The end of the Brexit transition period is at our doorstep. Whatever future trading relationship results from the EU-UK negotiations, it is likely to involve customs and other checks at borders and potentially additional tariffs. Businesses in the construction and energy industries with contracts in the EU may face delay and disruption to supply chains, difficulty in accessing migrant labour, and potentially increased costs on imported materials and equipment.
Greater risk that accompanies these changed trading conditions means greater scope for disputes. To prepare for the many unknowns facing these sectors post-transition, businesses are reviewing their contracts to identify weak points and clauses that might sensibly be renegotiated. A key part of this review should be a close look at whether existing dispute resolution clauses are fit for purpose. Now might be the time to think about adopting international arbitration as the dispute resolution mechanism in place of litigation before national courts for such contracts.
Jurisdiction and enforcement concerns
The UK currently enjoys the benefit of the Brussels Regulations1 and the Lugano Convention2 that make it relatively straightforward to:
- resist EU court proceedings issued in breach of an exclusive jurisdiction clause; and
- enforce UK court judgments in any EU member state.
On 1 January 2021 these will fall away.
The UK is seeking to rejoin the Lugano Convention (although this requires EU consent) and has acceded to The Hague Convention3 in its own right with effect from 1 January 2021. The Hague Convention offers similar protections to contracts containing exclusive jurisdiction agreements, but it is currently uncertain whether courts in EU member states will apply it to contracts entered into before 1 January 2021.4 Where The Hague Convention does not apply, issues of jurisdiction and enforceability will be determined by the domestic law in the place where jurisdiction is contested or enforcement is sought. So far as enforcement is concerned, this will likely be a more complicated and less predictable process than is currently the case.
Arbitration is fit for purpose
Arbitration is not affected by Brexit. The New York Convention5 will continue to apply and to require contracting states to treat arbitration agreements as valid, and to recognise and enforce foreign arbitration awards. The New York Convention currently has 165 contracting state parties, including the 27 EU member states – meaning that arbitration awards, at least in theory, can be enforced almost universally.
Other than the relative ease of enforcement internationally, there are many features that make arbitration particularly attractive for the construction and energy industries. Arbitration is already perceived as the best available process for resolving disputes in international construction contracts,6 and has long been the dispute resolution forum of choice for the international energy industry.7 The reasons for this include:
- arbitration offers a neutral forum for disputes between international counterparties that might otherwise be resolved in the courts of one party's home state;
- arbitration awards are final and binding and can only be challenged on limited grounds;
- parties can agree to keep the arbitration confidential and the hearings are private;
- parties can choose their own arbitrator(s) and could agree to appoint a technical expert to the panel where appropriate – such as an engineer, quantity surveyor or architect;
- the timetable is flexible, and parties can agree on expedited procedures to get a result quickly;
- parties can join third parties and/or consolidate multiple arbitrations by agreement or where the institutional rules so allow in order to ensure the award binds all necessary parties (such as an owner, contractor and original equipment manufacturer in a defect dispute); and
- the procedure is adaptable and parties can agree to procedural features that streamline the process, including limiting document production, capping submissions, using expert determination to resolve discrete issues; and using technology for key processes and hearings.
Businesses in the construction and energy industries that are parties to contracts with an EU nexus, or where enforcement in the EU may be necessary, should consider whether their dispute resolution clauses are fit for purpose as part of the broader contract reviews being undertaken to prepare for Brexit. International arbitration might well be the most suitable process to resolve future disputes and parties should consider renegotiating existing agreements (where possible) to provide for this.
The first step in any successful arbitration is getting the arbitration agreement right. Failing to do so can lead to costly and time-consuming satellite disputes. We can advise on the drafting of arbitration agreements including selecting the most appropriate forum and procedural rules, and ensuring that the dispute resolution clause is enforceable and not susceptible to enforcement risk.
For more information on international arbitration – what it is and how to draft an effective arbitration agreement – see our range of Quickguides available on our Arbitration Hub.
Authors: Dyfan Owen and Lucy McKenzie.
- Council Regulation (EC) No. 44/2001 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (the 2001 Brussels Regulation); and 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). The Brussels Regulations determine the rules that are applied by EU member state courts when giving effect to jurisdiction clauses and the enforcement of judgments within the EU. The rules provide that EU member states will uphold jurisdiction clauses that confer jurisdiction on the courts of member states, and that a judgment of the court of one EU member state can be enforced automatically in the court of another EU member state.
- Convention on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (the Lugano Convention). The Lugano Convention provides similar, protections to the Brussels Regulations, and extends to the EFTA states excluding Liechtenstein, so Iceland, Switzerland and Norway, in addition to the EU.
- The Hague Convention on Choice of Court Agreements came into force on 1 October 2015 and applies only where parties have agreed an exclusive jurisdiction clause. The Hauge Convention gives effect to exclusive jurisdiction clauses and provides for the enforcement of any resulting judgment in its member states. Current Contracting States are the EU (including the UK by virtue of its membership of the EU), Mexico Montenegro and Singapore.
- The UK takes the position that the Hague Convention entered into force for the UK on 1 October 2015 and that the UK has been a contracting state continuously from that date. The EU Commission has taken the position that the Hague Convention will only apply to exclusive jurisdiction agreements entered into on or after 1 January 2021, although this position is not binding on the courts of EU member states.
- The United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958) (the "New York Convention").
- Queen Mary University of London, 'Driving Efficiency in International Construction Disputes' (QMUL, 2019), p5.
- International Centre for Energy Arbitration, 'Dispute Resolution in the Energy Sector Initial Report' (ICEA, 2015).
