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26 Sep 2018

What a "no deal" Brexit might mean for international litigation

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Although a great deal has been written on what the legal landscape may look like after Brexit, much of it has inevitably been speculative, dependent as it is on the outcome of the negotiations. The outcome, of course, remains uncertain but the Government has now published as part of its technical notices in relation to a “no deal” Brexit one which outlines the position in relation to civil legal cases that involve EU countries. The overarching principles for commercial litigation are as follows:

  1. Jurisdiction and enforcement of foreign judgments - the Brussels Regulation and the Lugano Convention, and other EU related arrangements such as those with Denmark and the summary small and undefended claims procedures, will be repealed. The UK will revert to common law and existing statutory arrangements, though the UK will arrange to adopt the 2005 Hague Convention on Choice of Court Agreements (the “2005 Convention”).
     
  2. The majority of the Insolvency Regulation will be repealed. It appears that the European test for jurisdiction (i.e. COMI) will be retained but otherwise insolvency matters it will be governed by the general Insolvency Act regime, supplemented by the UNCITRAL cross border rules as implemented by the Cross Border Regulations 2006.  The impact of a “no deal” Brexit on insolvency proceedings appears significant, but is outside the scope of this note.
     
  3. The existing EU regulations for intra-EU court assistance such as the Service Regulation and the Evidence Regulation will be repealed. The UK will revert to the existing Hague Conventions in this area, together with any applicable common law rules.
     
  4. However, in the area of the rules for the choice of law in contractual and non-contractual disputes the UK will continue to adopt the rules in the Rome I and Rome II Regulations.

It is fair to say that despite its description, the notice is generally very short on technical detail.  However, the notice does bring into greater focus (without answering) some of the legal issues which will have to be addressed by commercial parties, and their legal advisers, in the event of a “no deal” Brexit.  Some of them are the following.

Jurisdiction agreements

The notice says that, in the event of no deal, the UK would take the necessary steps formally to “rejoin” the 2005 Convention in its own right, since at present the party to the 2005 Convention is the EU.  It is said that the 2005 Convention would come into force across the UK by 1 April 2019, so there would be a “gap” in coverage by the 2005 Convention between midnight on 29 March 2019 (exit day, and a Friday) and 1 April 2019 (a Monday).

The Ministry of Justice has also published a draft statutory instrument, explanatory note and impact assessment to set out the technical detail of the move from the Brussels Regulation regime to the 2005 Convention regime.  The impact assessment published with the statutory instrument states that there will be no monetised costs associated with it because of the increase in certainty which entering into the 2005 Convention would provide.  This might be an optimistic assumption, as there are a number of difficult legal issues raised by these papers:

  1. The first is that the UK is not at present a party to the 2005 Convention.  It is bound by virtue of the signature of the 2005 Convention, and its ratification, by the EU, but article 30 of the 2005 Convention states in terms that a Member State of a regional area, like the UK in this context, is not a party to the Convention as such.  It is not easy to see how the UK can sign the Convention or deposit an instrument of ratification until after the exit date.  The 2005 Convention (under article 31) will come into force on the first day of the month following the expiry of three months after the deposit by the UK of its instrument of ratification.  So, on that basis the earliest it would come into force as regards the UK would be 1 July 2019 (assuming that the UK could sign the 2005 Convention and deposit an instrument of ratification over the weekend of 30/31 March 2019).  The Government's assumption that the interim "gap" period before accession to the 2005 Convention would be 29 March to 1 April 2019 appears to be optimistic.
     
  2. The next issue is that article 16 of the 2005 Convention provides that it applies to exclusive choice of court agreements concluded after its "entry into force for the State of the chosen Court".  There is therefore an issue as to whether, because of the period (whether it is 2 days or 3 months plus) when the UK would not be a party to the 2005 Convention, this means that any jurisdiction agreement concluded before exit day or during the interim period is outside the scope of the 2005 Convention altogether and is not "revived" on the UK "re-joining" (in truth joining) the 2005 Convention in its own right.  The draft statutory instrument clearly recognises that this is at least a possible, and perhaps an inevitable, outcome.  It provides in effect that the 2005 Convention would be deemed to apply in the UK, as regards countries that are currently parties to the 2005 Convention other than the EU, to agreements entered into before exit date and to agreements entered into in the interim period between the exit date and re-entry into force of the Convention.  However, the 2005 Convention will only directly apply as regards EU countries (and presumably Lugano Convention countries) to agreements concluded after its entry into force.  The Explanatory Notes say that the deemed application of the 2005 Convention will not apply to choice of court agreements prior to exit day as regards EU members, which are governed by the Brussels Regulation - those will be the subject of a separate statutory instrument which is yet to be published.
     
  3. The above steps are no doubt designed to preserve as far as possible the “inward” effect (i.e. the effect in the UK) of the 2005 Convention and the Brussels Regulation (and also presumably the Lugano Convention) to agreements entered into prior to exit date and in the interim gap period.  However, at least as important a function of both the (recast) 2012 Brussels Regulation and the 2005 Convention is their “outward” effect.  Both provide for the ready enforcement of judgments, in the courts of other member states, given by the parties’ chosen court.  Also, both contain provisions which give primacy to the courts of the chosen state in jurisdiction disputes over spoiling proceedings in another member state jurisdiction – the so called “Italian torpedo”.  Given the implicit acceptance by the statutory instrument that there must be at the very least uncertainty as to the impact on jurisdiction agreements entered into both prior to exit date and during the interim period, this must raise the possibility that a party to any agreement entered into before the re-entry into force of the 2005 Convention will lose the benefit of those rights and protections in proceedings in jurisdictions outside the UK, whether in the EU and Lugano Convention states or the other states which have ratified the 2005 Convention (Mexico, Singapore and Montenegro). 
      
  4. Parties to contracts with pre-existing English jurisdiction clauses may therefore wish to consider whether it would be prudent to seek to enter into new, 2005 Convention compliant, exclusive jurisdiction agreements after the Convention’s ratification by the UK, by way of amendment to existing contracts.  In principle, since such agreements are independent of the main contract there is no reason why such an agreement should not be in very brief terms.  However, apart from the need to obtain the agreement of the other parties to such a separate choice of court agreement, it would involve the loss of the flexibility of any non-exclusive jurisdiction agreements (which obtain at least some degree of protection under the Brussels Regulation and Lugano Convention).  Also, as regards asymmetric (or one-way) jurisdiction clauses which are familiar in financing agreements there is, even in the English Courts, significantly more uncertainty as to whether they fall within the 2005 Convention.  Cranston J in Commerzbank v Liquimar [2017] EWHC 161 (Comm) concluded obiter that they do but acknowledged that there are significant arguments to the contrary. 
     
  5. Another prudent course, especially where it is not expedient to ask a counterparty to enter into an amendment to an agreement, would be to seek advice, in those jurisdictions where court proceedings or enforcement can be anticipated, on whether the courts of those jurisdictions would respect and uphold an exclusive jurisdiction clause in favour of a non-EU, non-2005 Convention, country (which is how the UK may well be treated). 

The effect on current actions in the UK 

As indicated, it is clearly intended that as far as possible the regime for jurisdiction and enforcement of judgments under the current Brussels Regulation (and the Lugano Convention) regimes will continue for actions in the UK.  However, in the event of no deal there will be the question of what will happen to procedural aspects of actions current prior to exit date which are presently governed by the Service Regulation and the Evidence Regulation.  Presumably these procedures will have to be stopped and restarted under applicable Hague Convention regimes or the common law.

The choice of law provisions

It has been signalled for some time that the UK would wish to continue with the provisions in the Rome I and Rome II Regulations for choice of law in contractual and non-contractual matters falling within their scope.  However, it takes only a glance at the Regulations to see that they are replete with references to Community law (including to the necessity for alignment with the Brussels Regulation).  Both adopt the Euro-approach of guidance/interpretation by reference to lengthy recitals.  Moreover, although the provisions of the Rome I Regulation largely adopt the provisions of the Rome Convention as applied by the Contracts (Applicable Law) Act 1990 and are familiar, there is relatively little jurisprudence (either of English appeal courts or of the CJEU) on the operation of the Rome II Regulation which in some respects differs significantly from the previous English common law and statutory choice of law rules in relation to torts and restitution.  The Regulation also adopts some concepts (e.g. culpa in contrahendo and negotorium gestio) which are essentially civilian in nature.  In practice, it appears that a substantial amount of re-writing would be needed to implement the Regulations in English law which in itself would be a very substantial undertaking in which one would expect a large degree of consultation and, probably, involvement of the Law Commission.  The prospect of such an important matter as choice of law being contained in a statutory instrument or instruments which will have to be produced under great time pressure, in the event of no deal, is a daunting one.  No doubt time will tell whether this will be needed.

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