Brexit – should you be choosing arbitration over litigation?

On 24 June 2016, the result of the UK’s referendum on EU membership revealed that the majority of UK voters had opted to leave the union. Since that date, the UK has seen the resignation of one Prime Minister, High Court and Supreme Court rulings on the correct process for triggering of Article 50 and a general election in which the ruling Conservative Party failed to win an overall majority. Now, one year on, it is still extremely difficult to predict with any certainty on what terms the UK will leave the EU.

One thing is certain, however; the long-stop date for exit negotiations is March 2019, two years after Article 50 was triggered – at which point all EU Treaties will cease to apply to the UK, including those governing jurisdiction and the recognition and enforcement of foreign judgments.

Given the current uncertainty, should commercial parties who contract on a regular basis with EU/EFTA counterparties be considering arbitration as their preferred dispute resolution mechanism?

The current position

Unless agreed otherwise, the following legislation will all cease to apply to the UK from March 2019:

• The Brussels I (Recast) Regulation, which regulates jurisdiction and the recognition and enforcement of judgments between EU Member States and has direct effect in UK
• The Lugano II Convention, which also regulates jurisdiction and the enforcement of judgments in civil and commercial matters between EU member states and the European Free Trade Association countries other than Liechtenstein, namely Iceland, Norway and Switzerland, and which was incorporated into UK law by the Civil Jurisdiction and Judgments Regulations 2009
• The Hague Convention on Choice of Court Agreements, which requires effect to be given to exclusive choice of court agreement and judgments of the courts nominated thereunder and which is effective between all EU Member States, Mexico and Singapore
• The Rome I and Rome II Regulations, which regulate the law applicable to contractual and non-contractual obligations respectively, in the absence of party choice

It is unclear what, if anything, will replace the above rules, but the government has acknowledged the need to ensure ‘an effective system of civil judicial cooperation’. The House of Commons Justice Committee has also said that:

“We recommend that protecting the UK as a top-class commercial law centre should be a major priority for the government in Brexit negotiations given the clear impacts on the UK economy of failure to do so. Protecting court choices and maintaining mutual recognition and enforcement of judgments are central to this objective: the government should aim to replicate the provisions of Brussels I Recast as closely as possible, perhaps using the EU-Denmark agreement as a blueprint. As a minimum, it must endeavour to secure membership of Lugano II and the 2005 Hague Convention in its own right. Rome I and II should be brought into domestic law.”

Arbitration as an alternative

Although the government has stated an intention to ensure effective judicial cooperation, at present it is not known what that will look like. Commercial parties who regularly contract with other EU Member States/EFTA countries are therefore in a position of not knowing, beyond March 2019, how jurisdiction clauses in their contracts will be interpreted and whether judgments obtained in the UK will be enforcement in other EU/EFTA countries and vice versa.

For such parties, it may be worth considering, at least in the short term until things become clearer, whether arbitration would be a more effective dispute resolution mechanism given that all 28 EU Member States are party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, as are Iceland, Norway, Switzerland, Mexico and Singapore.