Brexit: Impact on Cross Border Disputes – the Reality for Businesses

Brexit: Impact on Cross Border Disputes – the Reality for Businesses

Following the referendum, there has been much talk about the impact Brexit may have on existing contracts involving companies trading between Europe and the UK.

This opinion piece seeks to separate speculation from reality and answers a number of FAQs about the impact of Brexit on cross-border disputes.

Our business to business contracts contain a choice of “English law”. Do we need to change this?

The rules governing which law applies to a contract between parties based in different countries in Europe are set out in the two Rome Conventions[1]. These Conventions state that European Member States must give effect to a choice of law stipulated in a contract, regardless of whether that is of a country which is a member of the Rome Convention.

Accordingly, if your contracts contain an express choice of English law, then regardless of Brexit (and a UK withdrawal from the Rome Convention), other European countries who continue to be members of the Rome Convention would be required to respect a choice of English law. So in reality, nothing should change on Brexit. A choice of English law in a commercial contract should continue to be respected by Rome Convention countries in Europe.

Our business to business contracts say that any disputes are to be heard by the Courts of England and Wales exclusively – do we need to change this?

The rules governing which European country’s Court has the right to hear and determine a dispute are set out in the Brussels Regulation[2]. These rules provide that the Courts of an EU Member State must respect a choice of Court in a contract in favour of the Courts of another EU Member State. So if your opponent decides to bring Court proceedings against you in Spain, in breach of an express requirement in your contract that the English Courts are to hear the dispute, the Spanish Courts are obliged to halt their proceedings and let the English proceedings run their course.

It is important to be certain about which Courts are able to determine a dispute, for the following reasons:

It avoids the legal costs associated with arguing over the point in Court, and potentially having to deal with parallel proceedings issued in two countries at once which concern the same dispute;

At the outset of a commercial relationship, it is best to clearly identify which Court (or Courts) is able to give a Judgment, to ensure that any Judgment you obtain is actually going to be enforceable in another jurisdiction. For example, you may secure an English Judgment against a French company which obliges it to pay you money. Your opponent’s assets may well be based in France, so you will want to know (before you incur the costs of proceeding through the English Courts) that your English Judgment will ultimately be recognised and enforced in France, as if it were a French Judgment.

Without the certainty provided by the Brussels Regulation, European Courts could, theoretically, refuse to recognise an express choice of English Court jurisdiction in a commercial contract (and so refuse to enforce an English Judgment brought to them for enforcement). But is this going to happen in reality?

One factor which may assist the English Courts is that the EU has ratified the Hague Convention on Choice of Court Agreements[3] (HCCA). This convention could be important in the light of Brexit. If the UK ratifies the HCCA on its own behalf, then this would provide a consistent framework for European Courts to recognise an express choice of English Court jurisdiction in a commercial contract. Other non-European countries, such as Mexico and Singapore, have also ratified the HCCA.

Without a specific set of rules in the Brussels Regulation or without any other replacement international convention, each European country’s Court would need to determine whether it has jurisdiction to deal with a dispute that a party has brought to it, according to its own national law. Most commentators agree that our major trading partners in Europe will endeavour to give effect to a choice of English Court jurisdiction, regardless of the lack of any treaty or international convention framework.

So in reality, it should not be necessary to change your commercial contracts if they give the Courts of England and Wales exclusive jurisdiction to deal with a dispute.

Some of my business to business contracts do not contain any choice of governing law or jurisdiction and I regularly trade internationally – do I need to specify these?

The position for business to business contracts which do not contain an express choice of governing law or jurisdiction is more uncertain in light of Brexit. At the moment, there are specific rules which govern which European country’s law or jurisdiction applies in certain situations, where there is no express choice of governing law and jurisdiction. Those rules will cease to apply on Brexit and these issues will be determined according to the local law of the country where a party has brought a dispute to be heard.

A new Hague Convention[4] is in the process of being negotiated which could assist parties in this situation. However, it is a long way from signature and ratification.

As a result, we recommend that businesses always include a choice of law and jurisdiction in their business to business contracts where they are trading in Europe or in other countries around the world.

Will my ability to serve English proceedings on a party in Europe be affected by Brexit?

Yes – potentially. At the moment, there is a specific set of rules under the EU Service Regulation which govern how Court proceedings are to be served within the EU, in order for service to be effective.

Without these rules, in order to validly serve English proceedings in Europe, the main options are to serve either in accordance with local rules in the country where the party being served is based, through formal channels using the Hague Convention (which can be very slow indeed) or by some contractually agreed method.

Serving proceedings overseas can be expensive and time consuming. For this reason, if you are embarking upon a significant new commercial relationship or reviewing your existing contracts with a party based overseas, we strongly suggest requiring them to nominate an agent to accept service of Court proceedings in England, if a dispute ever arises.

We are negotiating a significant new contractual arrangement with a business in Europe – should we opt for Arbitration (rather than Court proceedings) to determine any disputes that might arise?

Arbitral awards are generally enforceable in states that have ratified the New York Convention. This will not change in light of Brexit, so arbitration is now increasingly seen as a more ‘certain’ option for dispute resolution in Europe.  Arbitration also has the benefit of being confidential, but it is not necessarily quicker or cheaper than Court action.

If you are considering requiring disputes to be referred to arbitration rather than the Courts, it is important to bear in mind that certain countries (like Italy for example) do not recognise interim remedies granted by an arbitrator. For instance, you may be concerned that your opponent who owes you money, based in Italy, is taking steps to put assets out of your reach. And, as such, you may wish to take steps to freeze or ring fence their assets. An arbitrator’s decision would have no effect in this situation – you would need to take steps directly through the Courts in Italy. For this reason we often advise clients who opt for arbitration to ensure that their contract specifically allows them to take interim steps in an appropriate local Court to preserve their position, until the arbitration has run its course.

For high value international contractual disputes in particular, we expect to see a rise in the use of arbitration as an alternative means of dispute resolution in the short term, in light of the outcome of the EU Referendum.

[1] Rome I (EC) 80/934; Rome II (EC) 864/2007

[2] Brussels Regulation “Recast” (EU) 1215/2012

[3] Hague Convention on Choice of Court Agreements 2005

[4] The Special Commission on the Recognition and Enforcement of Foreign Judgments; the “Judgments Project”

Sara Chisholm-Batten is a Partner in our commercial disputes team specialising in cross border enforcement measures. She has a wealth of first hand international experience in this area in Europe and around the world, including in Emerging Markets.

If you would like to discuss any of the issues set out in this article which may affect your business, please do not hesitate to contact our team of specialists.

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