Assessing the impact of a no-deal Brexit on litigation

Published on
6 min read

Disputes have always created uncertainty and disruption for businesses but the absence of a deal on the UK’s exit from the European Union would mean less clarity for litigants over how disputes can be resolved effectively.

Overview

There are broadly three key issues relevant to any cross-border dispute:

  • Which law will govern a dispute under an agreement?
  • Which court will have jurisdiction to hear a dispute?
  • Will a judgment in the UK be recognised in an overseas state, and if so, how?

At this stage, there do not look to be particular issues arising from Brexit on governing law, but jurisdiction and enforcement look as if they will be, at the very least, less straightforward matters in both existing and future disputes.

Governing law

The governing law of an agreement determines which law applies the relationship, including:

  • Whether terms have been incorporated
  • How they are interpreted
  • Whether obligations have been breached
  • What liability or remedy flows from that breach
  • Whether liability has been effectively excluded or capped

In among all the current confusion, the impact of Brexit on governing law issues should be minimal. Rome I Regulation (Rome I) applies across all EU member states. This contains a set of rules to determine which national law governs an agreement and, subject to a number of limited exceptions, an express choice of law clause will be upheld. Rome I will still apply in other EU Member States after Brexit. This means an English law governing law clause should continue to be upheld.

Jurisdiction and enforcement

Jurisdiction and enforcement are significant areas of concern post Brexit. Both issues are dealt with by Brussels Recast. Under this, subject to some exceptions, a jurisdiction clause will be treated as being exclusive and will be upheld. Brussels Recast also provides that judgments from one EU Member State are automatically recognised and enforceable in any other EU member state as if it was a judgment from that Member State.

In the absence of a ratified deal with the EU, or a further extension of the deadline, on 31 October 2019, Brussels Recast will no longer apply in the UK. Any withdrawal agreement (if there is one) seems likely to contain an arrangement that would mean Brussels Recast will continue apply to claims commenced before the end of any transition period. Without any transitional provisions, there will be uncertainty for ongoing disputes as once Brussels Recast no longer applies, an individual EU state will no longer be compelled to apply it where one of the counterparties was based in the UK (even if proceedings are already underway). It would be a matter of each individual state (under its own laws) to decide whether or not to enforce an English judgment.

In England, the Civil Jurisdiction and Judgments (Amendment) (EU Exit) Regulations 2019 will come into force in the event of a no-deal. This contains saving provisions, which means the English courts will continue to apply Brussels Recast to judgments obtained from other EU Member States before 31 October 2019, and to questions of jurisdiction where proceedings were commenced before that date. This is not the approach the EU has adopted in its published guidance which, in essence, is that Brussels Recast will not apply at all to any UK judgment obtained before exit day (unless certain enforcement steps have already taken place in the EU), or any proceedings pending before exit day.  This means we could potentially have a situation where a judgment of another EU Member state is enforceable in England, but an English judgment, even one obtained before exit day, is not recognised across the EU

A number of possible arrangements have been discussed and debated over the past few years, although neither offer the certainty or efficiency of Brussels Recast.

Lugano Convention

The Lugano Convention applies between the EU and the wider European Free Trade Area states (Norway, Switzerland and Iceland). It has effect in the UK only through the UK’s membership of the EU, so it will no longer apply after the UK’s exit unless some other agreement is reached. Broadly, it operates in a similar way to Brussels Recast except that judgments have to be registered in the enforcing state before they can be enforced.

It has one significant drawback, which is that it does not have an effective mechanism to prevent parties deliberately commencing proceedings in the wrong court. This tactic provided to be surprisingly effective at slowing down cross-border disputes because it needs the court first seised of the dispute to decline jurisdiction before another can accept it. The 2017 House of Lords Report expressed a view that the Lugano Convention was the most workable and preferred solution if it was not possible to agree to Brussels Recast remaining in effect. While that still seems to remain the position, it is not possible for an individual state (such as the UK) to unilaterally ratify the Lugano Convention.

Hague Convention on Choice of Court Agreements

In the absence of a deal or a further extension, The Hague Convention on Choice of Court Agreements will come into effect in the UK on 1 November 2019 (the first working day after the current Brexit date). This convention provides that if a contract contains a written exclusive jurisdiction clause, then the named court will have exclusive jurisdiction to determine the dispute and that any judgment issued by that court will then be recognised in all another convention states. This convention is relatively untested as it has only so far been ratified by the EU, Mexico, Singapore and Montenegro (the last two only within the last two years).

It does have one key limitation which is that does not apply to contracts which contain a non-exclusive jurisdiction clause. Jurisdictional disputes where there is no jurisdiction clause, or jurisdiction is non-exclusive, are a matter of local law. In England, this means falling back on common law rules. The House of Lords Report in 2017 described that as a recipe for confusion, expense and uncertainty.

Whether or not to choose an exclusive jurisdiction or non-exclusive jurisdiction can be a finely balanced decision, particularly in contracts where something other than damages might be needed as the remedy, where some urgent relief might be needed, or where transactions are taking place in more than one jurisdiction. This now means a much more careful balancing exercise needs to be carried out when deciding whether to agree to a particular court having exclusive jurisdiction.

Other regulations

A number of other regulations the UK currently benefits from would also no longer apply from 31 October 2019 in the event of a no-deal Brexit. These do make litigation at least a little more straightforward and quicker and cheaper as a process, if not more certain. They include:

  • Service of Documents Regulation, which provides standard rules for how documents are to be served within the EU. There are alternative conventions in place, but they tend to be slower and more expensive.
  • Taking of Evidence in Civil or Commercial Matters provides a streamlined process to allow evidence to be collected or taken from witnesses who reside overseas. Again, co-operation is usually provided outside this Regulation, but it is not guaranteed.
  • European Payment Orders, which have been particularly effective in providing a streamlined procedure for the collection of small uncontested debts of €2,000 or less.
  • European Enforcement Orders, which provide a streamlined procedure for claims that are uncontested or debts that are not disputed.

Arbitration

One area unaffected is arbitration, which has usually been limited to contracts between parties outside the EU. Given the lack of any clarity over enforcement arrangements, arbitration is becoming a more common option for contracting parties to consider given that awards are capable of being recognised in over 150 states, including all EU member states.

Further information

For further information on this and Brexit issues see our dedicated Brexit page.

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