How does Brexit impact upon governing law, jurisdiction and enforcement of commercial contracts?

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Since the referendum vote, there has been a great degree of speculation over what impact Brexit will have on the English legal system.

Since the referendum vote, there has been a great degree of speculation over what impact Brexit will have on the English legal system and whether those changes will affect the popularity of English law and the English courts as a choice for parties entering into commercial agreements.

What is the impact on existing contracts?

Clients who have raised concerns in relation to existing contracts have mainly focussed on these questions: 

  • Should they continue to allow English law to govern the contract? 
  • Will Brexit impact upon the jurisdiction of the English courts and how litigation is conducted with a EU party? 
  • Will judgments from English courts continue to be enforceable across the EU?

How might Brexit affect the decision to choose English law as the law governing a contract?

It should not have any impact. If English law was the most suitable law for parties to choose pre-referendum, then it should still remain the most suitable choice in the future.

English commercial contract law (as opposed to consumer law) has largely been unaffected by EU regulation. English contract law, rather than being enshrined in a fixed civil code, has developed through case law and judicial consideration. It recognises the freedom of parties to contract on their own terms and does not, for example, impose duties of good faith which are often difficult to define.

English courts have historically dealt with large and complex commercial cases and they have given detailed and well-reasoned judgments which are followed in subsequent cases. Key decisions are often relied on in other jurisdictions around the world.
For these reasons, English law tends to bring certainty to commercial transactions and parties often choose English law as a neutral law for that reason.

What about governing law clauses?

A governing law clause determines which country’s law applies to a contract. Whatever the terms of the deal negotiated by the UK as part of Brexit, it is very unlikely there will be a significant change in how these clauses operate. The Rome 1 Convention (which applies across the EU) provides that a contract will normally be governed by the law of the country chosen by the parties, even if that choice is the law of a non-EU member state. This is similar to the position which would apply under English law if Rome 1 ceases to have effect in the UK.

How might Brexit affect the jurisdiction of the English courts?

Jurisdiction is concerned with which country’s court should hear a dispute and, broadly speaking, it tends to makes sense for the jurisdiction clause to match the governing law.

The Brussels I Regulation (Recast) provides a set of harmonising rules for determining which country has jurisdiction within the EU. Subject to some exceptions, if a contract contains an exclusive jurisdiction clause in favour of one member state, then only that member state has jurisdiction.

Post-exit, it would in theory be open to each individual member state to apply their own rules but it would be a significant shift if they immediately ceased to respect the jurisdiction of the English court where is has been chosen by the parties.

Many commentators are suggesting that the UK could sign up to the Lugano Convention which applies between the EU, Iceland, Norway and Switzerland. If that did happen then similar rules to the current rules would apply but there would be greater scope for parallel proceedings.

What impact might this have on court proceedings with an EU party?

It may make proceedings slower but probably not significantly. There is currently no need to obtain the court’s permission to serve an EU party overseas and although that could change, contracts could still provide for service to be effected on an agent in the UK. There is currently a streamlined procedure for seeking European Payment Orders for the recovery of undisputed debts which are enforceable throughout the EU. If that procedure is not retained then debt recovery will become less straightforward.

What about the enforceability of an English judgment?

One benefit of the current Brussels Recast regime is that judgments of one member state will be recognised in all member states, provided the judgment is final and is for a sum of money. If this regulation were no longer to apply, we would lose this benefit and it would be up to each member state to decide whether to recognise an English judgment and permit its enforcement. However, it does seem unlikely that we would revert to a position where a judgment would be incapable of being enforced. If the UK were to sign up to the Lugano Convention, we would see little significant change because, as with Brussels Recast, the Lugano Convention also provides for mutual recognition of judgments.

This uncertainty does, however, highlight the need for parties to think carefully about whether or not to have an exclusive jurisdiction clause in their contracts. This will become a more finely balanced decision if in the future it is uncertain whether judgments will be automatically recognised in the defendant’s home state.

What about arbitration?

In theory, there should be little impact on arbitration.

There are several major economies (the US and Japan being examples) where there is no bilateral or reciprocal enforcement of judgments with the UK. In those cases, it is normal for parties to include arbitration clauses in their contracts as over 150 counties (including all EU member states) have signed up to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

For that reason, the post-referendum uncertainty might become yet another factor to consider when deciding whether to include an arbitration clause, but arbitration will not be suitable for every dispute.

For more information please visit www.mills-reeve.com/brexit.

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