On 24 December 2020, whilst most people were trying to finalise their Christmas shopping, the UK and the EU succeeded in finalising the post-Brexit trade and co-operation agreement. Despite the fact that the UK left the European Union on 31 January 2020, a transition period was put in place until 31 December 2020 (the Transition Period) in order for the parties to fine-tune the UK’s departure from the EU and set out the rules governing the UK / EU relationship at the end of the Transition Period. Although much of the media’s focus in the final stages of the negotiation concerned fishing rights, it is important to consider a less publicised part of the agreement regarding civil justice cooperation following the end of the transition period.
Clauses in commercial contracts often deal with governing law and jurisdiction of the courts. Governing law decides which is the applicable law (i.e. whether the contract is governed, for example, by English law or Spanish law), in the event that a dispute later arises between the parties. Of equal importance, jurisdiction clauses determine which Court will hear, and ultimately decide, the dispute. These clauses are frequently seen as mere ‘boilerplate’ clauses and are often overlooked. Now that the certainty of the Transition Period has come to an end it is more important than ever that parties exercise caution when it comes to drafting contracts to avoid unwittingly becoming embroiled in litigation in a foreign jurisdiction which is not of your choosing or otherwise failing to comply with the prevailing legislation.
The courts of all EU member states are bound by two regulations which, colloquially, are known as the Rome I Regulation and the Rome II Regulation (the Rome Regulations). In essence, the Rome Regulations require the courts of EU member states to recognise the governing law clauses of a contract, irrespective of whether the choice of law is that of a member state or a non-member state. Following the expiration of the Transition Period, the UK has decided to incorporate the Rome Regulations into domestic law, as part of the European Union (Withdrawal Agreement) Act 2020 (the Withdrawal Act). Therefore, as a result, the English courts continue to recognise foreign governing law clauses in the same way prior to the UK’s withdrawal from the EU.
Perhaps of greater importance is the position in relation to jurisdiction clauses. As explained, jurisdiction clauses determine which court will decide a dispute should one arise. There is automatic recognition and enforcement of judgments across the EU as a result of the ‘2007 Lugano Convention’ and the ‘Recast Brussels Regulation’. For example, this meant that, prior to the UK’s departure from the EU, if a claimant obtained a judgment in the English courts against a Polish defendant then, by virtue of the Lugano Convention and the Recast Brussels Regulation, the claimant would be able to enforce its judgment against the Polish defendant. The Polish courts would be obliged to recognise the judgment which was passed in the English courts and enforce it accordingly.
Although the UK has applied for accession to the Lugano Convention in its own right (which is due to be decided later this year), for the time being, it still benefits from this automatic recognition and enforcement of judgments across the EU (with the exception of Denmark), and limited other countries including Singapore, Mexico and Montenegro, having acceded to the Hague Convention on Choice of Court Agreements (the Hague Convention) on 28 September 2020, which took effect from 1 January 2021.
Broadly speaking, the Hague Convention operates in a similar way to Recast Brussels Regulation and the Lugano Convention, insofar as it recognises exclusive jurisdiction clauses. An exclusive jurisdiction clause is a clause which limits the hearing of a dispute to the courts of a particular jurisdiction. By way of example, in a contractual dispute, whereby the contracting parties have submitted to the exclusive jurisdiction of the courts of England and Wales, none of the contracting parties will be able to later argue that the courts of Germany should have jurisdiction to hear (and thus decide) the dispute.
It is important to note that the Hague Convention does not contain any provisions for the recognition and enforcement of judgments given in the court of a contracting state (i.e. the English courts) in the absence of an exclusive choice of court agreement.
It follows that, in light of Brexit, it is crucial that all contracts with EU member states (or indeed any other signatories to the Hague Convention) contain an exclusive jurisdiction clause in order to continue to enjoy the benefits of automatic recognition and enforcement of judgments across the EU. However, in order to provide clarity in the event of a dispute, for most contractual parties, it would be good practice to ensure that all contracts (irrespective of the location of the counter-party) contain an exclusive jurisdiction clause.
Has Brexit had an impact on the enforcement of awards obtained via arbitral proceedings?
The UK’s withdrawal from the EU has had little impact on commercial arbitration which is a contractually agreed forum for resolving disputes between international parties. However, it remains important to carefully consider the ‘seat’ in the arbitration agreement which is the judicial place of the arbitration and provides the governing law.
In terms of the enforcement of Arbitration Awards, the UK remains a signatory to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention). The New York Convention provides for the enforcement of arbitral awards within contracting states. Due to the fact that the UK, the countries comprising the EU and EFTA countries are all signatories to the New York Convention, the enforcement of any arbitral awards remain unaffected.
If you would like to discuss governing law or jurisdiction clauses in light of Brexit, please do get in touch with our Dispute Resolution department today.