Brexit: impact on dispute resolution

On 29 March 2017, UK Prime Minister Theresa May wrote to European Council President Donald Tusk to notify him of the UK's intention to leave the European Union.   The following day, the UK Government published its White Paper on the Great Repeal Bill (now the European Union (Withdrawal) Bill (the Withdrawal Bill)), setting out its approach to converting existing EU law into domestic law post-Brexit.  Despite significant progress on key points (with a measure of compromise shown, particularly on what had been "red lines" for "Brexiteers", such as any continuing role for the European Court of Justice (the CJEU)¹), the UK and EU are yet to finalise a "divorce" deal.  One of the many issues under negotiation is the extent of judicial co-operation in civil and commercial matters post-Brexit, i.e. the impact Brexit will have on choice of law and jurisdiction.

Judicial co-operation may not be a headline issue in the daily newspapers but it is recognised as an important foundation for commerce – and potentially significant in the bid to ensure the UK legal services market (a significant element of UK invisible exports) does not suffer post-Brexit. The EU Commission set out its position on judicial co-operation on 13 July 2017. On 22 August 2017, the UK Government published its response. Unlike the EU's paper, the UK's paper looks beyond transitional arrangements to a future relationship.

Here we look at the impact Brexit may have on dispute resolution in the UK, including the potential threat of foreign investors bringing claims against the UK in the event that Brexit has a damaging effect on the value of their UK-based investments.

Civil judicial co-operation: the current framework

There are various EU instruments that govern the interaction between the different EU legal systems in cross-border situations. These include Rome I, Rome II, the Brussels Regulations and the Lugano Convention². These instruments provide certainty by avoiding litigation of an issue in the courts of more than one EU member state. They ensure that each EU member state applies the same rules to determine both governing law and which court has jurisdiction to hear the case, and to ensure ease of recognition and enforcement in one EU member state of a judgment obtained in another.

Once withdrawal from the EU is effective, these instruments will no longer apply to the UK. While the UK Government has stated that it will take steps to adopt UK agreements with the EU into domestic law, the reciprocal nature of some of these instruments means that wholesale adoption will not be possible. The long-term implications will only become apparent once it is known what any negotiated deal and the replacement instruments will look like.

Will the approach to choice of law clauses change?

The short answer is no. The courts of England and Wales currently apply Rome I in contractual disputes and Rome II in non-contractual disputes (such as claims in tort). These regulations do not require reciprocity, so the position should not change post-Brexit, as the UK Government has confirmed that both will be incorporated into domestic law as part of the Withdrawal Bill. 

Likewise, the rest of the EU will continue to give effect to English governing law clauses because Rome I requires EU member states to give effect to the governing law chosen by the contracting parties, irrespective of whether it is the law of a member state, or whether the parties are from outside the EU.

In addition, the reasons for choosing English law – such as certainty and respect for party autonomy – will not change as a result of Brexit. It will remain just as good a choice of governing law, supporting contractual certainty, post-Brexit as it does now. Brexit should therefore not deter contracting parties from opting for English governing law clauses. (However, it is striking that certain EU financial institutions have already taken steps to adopt Paris-based arbitration mechanisms in place of London court jurisdiction, although the choice of English law remains – for now.)

Does the choice of English law remain a good one?

Yes. Currently, English law encompasses UK legislation, case law and EU law. What English law looks like post-Brexit will depend on the extent to which the UK Government decides to adopt existing EU legislation (and does not repeal it as part of any process of reviewing EU law incorporated into English law). The Withdrawal Bill confirms that, to the extent possible, all existing EU law will be enshrined in English law once the UK leaves the EU. So, wherever possible, the same rules and laws will apply on the day after the UK leaves the EU as before. This will achieve certainty in the short term, but the UK parliament will then be able to amend and repeal any unwanted aspects. 

The major "sticking point" is the role of the CJEU post-Brexit. The Withdrawal Bill confirms that historical CJEU case law will have the same precedential status as decisions of the UK Supreme Court. As such, the courts of England and Wales will interpret EU-derived law by reference to CJEU case law as it stands on the day the UK leaves the EU. Going forward, however, the CJEU will no longer have direct jurisdiction in the UK. This means that there could arise a divergence in approach between the CJEU and the courts of England and Wales. However, the UK paper does acknowledge the role of the CJEU as "the ultimate arbiter of EU law within the EU"³  and it is likely that the courts of England and Wales will have regard to decisions of the CJEU when applying EU law principles (although the judiciary has requested legislative certainty on this). Existing legal principles and the breadth of what may be considered "persuasive authority" by the courts of England and Wales give valuable flexibility here. 

Contracting parties will therefore need to consider what impact EU law has on their contracts, particularly those drafted to reflect, rely upon, or fall within, certain EU laws or "safe harbours", and whether future-proofing/Brexit clauses are required. 

Is the choice of English court jurisdiction affected by Brexit?

Here the position is potentially more complicated. Currently, the Brussels Regulations determine the rules which are applied by EU member state courts when giving effect to jurisdiction clauses and the enforcement of judgments within the EU. These rules mean that: 

1. EU member state courts will uphold jurisdiction clauses that confer jurisdiction on the courts of member states; and 
2. enforcement of a judgment of one EU member state in another is straightforward. 

Because of its reciprocal nature, the Brussels regime cannot simply be retained by importing it wholesale into English law. The UK Government has confirmed that it will seek to agree similar arrangements, but no specific proposals have been put forward, and the EU paper⁴ does not address arrangements going forward. Much will therefore depend on the negotiations.

There is scope for optimism (assuming it is desirable that the UK continues to recognise EU member state court decisions). The EU and UK papers do appear to agree essentially on how judicial co-operation will work during the transition period. In particular, existing EU arrangements will continue to apply to legal proceedings commenced pre-Brexit and choices of court made pre-Brexit. 

The UK has taken this further by proposing that existing arrangements should also apply to any judgments flowing from pre-Brexit choice of court agreements. If the EU agrees to this proposal, this at least puts an end to the current uncertainty surrounding enforceability of English court judgments for choice of court agreements entered into pre-Brexit. 

The Government has also confirmed its intention to ratify the Hague Convention on Choice of Court Agreements (the Convention). The Convention operates to give effect to exclusive jurisdiction clauses and enforcement of any resulting judgment. It only came into force on 1 October 2015 and as such remains untested. However, the EU has ratified it (as have Mexico and Singapore), and so the Convention potentially provides a fallback position if there is no deal on judicial co-operation post-Brexit. Nonetheless, it is not ideal as it only applies to exclusive jurisdiction agreements and any resultant judgments (unless extended to apply to judgments flowing from a non-exclusive jurisdiction clause, but as yet no contracting states have exercised that option). The Explanatory Report to the Convention confirms that this does not cover asymmetric clauses (where one party is required to bring proceedings in one jurisdiction exclusively, while the other party has the option to bring proceedings in any competent jurisdiction).

There is also a potential issue in respect of timing as to application. The Convention only applies to jurisdiction agreements concluded after its entry into force in the state of the chosen court. The UK is currently a signatory via its membership of the EU. It can only ratify (unilaterally) in its own right once the EU treaties no longer apply. If there is a lengthy gap between Brexit and the UK's ratification of the Convention, that could be an issue. However, it is hoped the fact that the UK Government has recognised the potential problem will mean that any problematic gap will be avoided.

What if no deal is reached?

As mentioned above, there seems to be EU and UK consensus that existing EU arrangements will continue to apply with regard to legal proceedings commenced pre-Brexit and choice of court agreements made pre-Brexit. As such, any choice of court agreement reached pre-Brexit will be upheld and recognised by EU member state courts post-Brexit.

Looking further ahead, if no deal is reached, the general approach of the courts of England and Wales towards jurisdiction clauses is unlikely to change. Choice of jurisdiction will generally be upheld. It is also likely that courts of EU member states, applying the Recast Brussels Regulation, will continue to uphold English jurisdiction clauses where the courts of England and Wales are first seized, although the position is less certain where proceedings are commenced first in an EU member state court.

The greater potential impact is on the enforceability of judgments of the courts of England and Wales as – subject to whatever arrangements are negotiated – holders of those judgments will lose the automatic right to enforce judgments throughout the EU. Instead, the national law of each EU member state would determine the enforceability of a given judgment. As such, if enforceability within a particular EU state is an issue, contracting parties should give careful thought as to whether their dispute resolution clause is fit for purpose. 

An opportunity for international arbitration?

Although it is too early to say what the long-term implications will be, the courts of England and Wales may lose business to EU member state courts on matters where EU law is concerned in so far as parties are averse to any degree of uncertainty. Certain EU regulations also provide that disputes should be heard by an EU member state court or in an EU member state-seated arbitration.

However, given London's position as a financial centre and the popularity of English law as the law governing international business relations, it is generally considered unlikely that Brexit will have such an impact. Indeed, some have argued that the courts of England and Wales will be a more attractive jurisdiction once the restrictions imposed by the Brussels regime fall away (for example the removal of the West Tankers limitations on anti-suit injunctions).

The more likely threat to the courts of England and Wales is international arbitration, which may become more attractive as a result of Brexit, in so far as parties may wish to retain the advantages of contractual certainty that flow from its use while avoiding any degree of uncertainty concerning enforcement. The international arbitration regime is based on the New York Convention, which provides for recognition by national courts of arbitration agreements, and broad international enforcement of arbitration awards. As such, international arbitration and the enforceability of awards is not affected by Brexit. Therefore, provided there are no other objections to arbitration, agreeing to English-seated arbitration offers the simplest solution if enforcement of English court judgments post-Brexit is a concern.

Investor protection in the UK

Subject to whatever trade deal is reached with the EU, investor protection under international law in the UK may improve post-Brexit. Since the Lisbon Treaty came into force in 2009, the EU has assumed exclusive competence with regard to any trade agreements entered into between EU states and non-EU states. The EU Commission has taken an interventionist approach with regard to any bilateral investment treaties (BITs) between EU member states (intra-EU BITs), intervening in intra-EU investment arbitrations: arguing, for example, that the tribunal lacked jurisdiction, and in one case finding that the resultant award amounted to state aid⁵. Post-Brexit, and pending a UK/EU deal, investors will be able to rely on the BITs the UK has in place with EU member states free of EU "interference". The UK will also be free to maintain its many BITs with non-EU states and enter into new ones. 

Brexit will also have implications for the trade deals currently being negotiated by the EU. These include free trade agreements with the USA (the Transatlantic Trade and Investment Partnership or TTIP), Canada, Japan and China. Whereas the deal with Canada (the Comprehensive Economic Trade Agreement) has entered into force provisionally, the other agreements are still being negotiated (although, the TTIP negotiations between the EU and USA were paused earlier this year). The UK will no longer take part in these negotiations and, post-Brexit, will have to negotiate new deals. That said, given the complexities created by the fact that the EU has to negotiate on behalf of all EU member states, it may well be that the UK will find it easier to negotiate its own deals by itself. 

Separately, in September 2017, the Council for the European Union gave the go ahead to the European Commission to begin talks for the establishment of a multilateral investment court to settle investment disputes as an alternative to the investor-state dispute settlement system. The UK would not be obliged to adopt this alternative disputes process and it will instead be able to continue to use the tried and tested investment arbitration procedure.

1. In a joint report from the negotiators of the EU and the UK Government, dated 8 December 2017, it was confirmed that the EU and the UK are in agreement with respect to the role of the CJEU in the context of the rights for both UK citizens living in the EU and EU citizens living in the EU. However, formal agreement on the wider role of the CJEU remains to be seen.
2. The Rome I Regulation on the law applicable to contractual obligations ((EC) 593/2008) (Rome I); The Rome II Regulation on the law applicable to non-contractual obligations ((EC) 864/2007) (Rome II); Council Regulation (EC) No. 44/2001 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (the 2001 Brussels Regulation); Regulation (EU) No. 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (recast) (the Recast Brussels Regulation); and the Convention on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (the Lugano Convention).
3. "Providing a cross-border civil judicial cooperation framework: a future partnership paper", 22 August 2017, paragraph 20. 
4. "Position paper on Judicial Cooperation in Civil and Commercial matters", 13 July 2017. 
5. In December 2013, the ICSID Tribunal in Ioan Micula, Viorel Micula and others- v - Romania (I) (ICSID Case No. ARB/05/20) ruled that Romania had breached the fair and equitable treatment standard in the Sweden-Romania BIT. However, the EU Commission later ordered Romania to recover the compensation it paid to the claimant investors pursuant to the award on the basis that the grant of such compensation constituted new state aid incompatible with EU Law.