Cross-Border dispute resolution forums: the Brexit effect
There is no shortage of uncertainties in the wake of the outcome of the referendum on the question of leaving the EU. The Prime Minister has made it clear that “Brexit means Brexit” but there is no consensus on what Brexit will look like or when it will occur. When changes do take place, they may have a significant effect on the ability of parties to resolve their disputes. In this article we discuss the potential issues parties to cross-border agreements may face in relation to the question of jurisdiction and provide some key matters for consideration when entering new agreements, including the merits of bypassing the Court altogether.
Jurisdiction: A Short Summary
Where one of the parties to an agreement is based outside England and Wales, the question of jurisdiction (that is, the ability of a court to determine any dispute) will need to be considered.
Procedure, remedies and of course timing and costs will vary significantly depending on which court determines a dispute. These differences may, in a practical sense, make the difference between winning and losing a case, and will certainty affect the commercial viability of any case. There may also be the risk of parallel proceedings taking place in different jurisdictions.
In England and Wales, there are two general sets of rules used by the Court to determine the question of jurisdiction, a European regime based on EU conventions and regulations and, where the European regime does not apply, the common law rules.
The European Regime
The European regime is now based primarily on the Recast Brussels Regulation (which binds all EU Member States), although the 2001 Brussels Regulation, and the Brussels and Lugano Conventions may be relevant where one of the parties is based in Denmark, Iceland, Norway or Switzerland. A more comprehensive analysis of the Recast Brussels Regulation is available in our article here https://www.hcrlaw.com/blog/brussels-regulation-recast-changes-eu-rules-jurisdiction-enforcement-judgments/
In summary, the European regime provides a fixed set of rules for determining which court will have jurisdiction to decide a dispute. The fundamental principle (although there are exceptions, such as where a matter is intrinsically linked to a specific jurisdiction by virtue of, for example, relating to real property) is that the parties should be free to choose in advance which Court will resolve their dispute. In the absence of express choice, the starting point is that a defendant should be sued in the courts of its own jurisdiction, but this is subject to a number of exceptions and restrictions. The European regime is designed to provide certainty (for example, by preventing the possibility of parallel proceedings ongoing) and although grey areas within the rules remain, it is generally effective in doing so.
The European regime also deals with the mutual recognition and enforcement of judgments. The importance of this should not be underestimated. As matters stand, a judgment obtained in England can be easily enforced against a defendant based in another EU member state, maximising the chances of recovery and thereby facilitating willingness for cross-border dealings.
The Common Law Rules
Unless the European regime applies, the Court of England and Wales will enforce the common law rules which are based on the principles of service of proceedings and submission to the jurisdiction. The Courts of England and Wales will have jurisdiction over a defendant who is served within the jurisdiction of England and Wales. Permission to serve a defendant out of the jurisdiction must be obtained from the Court, which will involve convincing the Court that the claim is a type which it has the power to decide; that the claim has a prospect of succeeding; and that England and Wales is the appropriate forum to determine the claim. This process entails an additional layer of costs and may not be successful. The common law rules will not prevent parallel proceedings being issued in another country and will not result in a judgment which will necessarily be recognised let alone enforced in another country. For example, China will not recognise or enforce an English Judgment and will require proceedings to be issued in China.
Jurisdiction: the Brexit Effect
The referendum was concerned with the UK’s relationship with the EU. Its outcome will not affect the power of the Courts of England and Wales to deal with disputes where both parties are within this jurisdiction or where the common laws will apply in any case.
As far as the European regime is concerned, the referendum result had no legal effect. The regulations and conventions set out above remain directly binding on the Courts of England and Wales, and no such changes will occur until the UK formally leaves the EU which, on the closest analysis, will not be for at least two years and in reality is likely to be even further away. There is therefore no need to panic. However, planning should commence.
At this stage, we simply do not know (and the government has to date been unable to provide any suggestion) what agreement will be reached with the EU following the UK’s departure. What we do know is that, upon that departure, the regulations listed above will in theory immediately cease to apply, so the question of jurisdiction and the recognition and enforcement of judgments must be dealt with either expressly by agreement with the EU or otherwise through the common law rules.
Common sense would suggest maintaining the status quo by reaching an agreement whereby the provisions of the European regime continue to apply, at least on a transitional basis. However, the outcome is perhaps based less on legal common sense than on political will and pressure. UK businesses entering into contracts with EU member states within the next couple of years will have no idea whether the current regime will apply if and when any dispute arises between them. Likewise, they will not know whether any judgments they obtain are likely to be enforced by the home court of the other party. Perhaps a worst case scenario, but a possibility nonetheless, is that the Courts of the EU Member States will not defer to the jurisdiction of the Court of England and Wales or recognise its judgments.
Depending on the terms of the agreement reached with the EU for post-Brexit relations, cross-border litigation may become considerably more risky and harder to justify commercially. This in turn could affect both the appetite for parties to enter into cross-border agreements but also the willingness of parties to breach those agreements, gambling that the other party may be unwilling to face the increased litigation risks.
It is impossible to mitigate entirely the risks which arise out of the uncertainty of the question of jurisdiction in the wake of Brexit. However, planning at the point of forming a contract can go some way to minimising the risks. We suggest the following areas for consideration.
Choice of jurisdiction
The principle of the freedom of the parties to choose the jurisdiction that will apply to the agreements is now well established. Irrespective of what new regime is put in place (or whether the Courts of England and Wales will simply fall back on the common law rules), it is perhaps unlikely that any Court or forum will be willing to disregard the express choice of the parties (subject of course to the exceptions which already exist). An express choice of jurisdiction will be highly persuasive if not binding. Provided that the parties can agree on a jurisdiction, it is eminently sensible to do so. The alternative would be to rely on rules which, by the time a dispute arises, may have changed entirely.
Break clauses/force majeure
In circumstances where neither party knows what the landscape will look like after Brexit (both in relation to the question of resolving disputes but also more generally), it may be worth considering whether either party should be given the ability to terminate the agreement by notice (or indeed whether it should terminate automatically) in certain circumstances. For example, an agreement could provide that either party is entitled (perhaps for a limited period only) to give a period of notice to terminate the agreement in the event that the UK does actually leave the EU.
Dispute resolution clauses
There are many compelling reasons for parties to consider alternative dispute resolution in most cases. Where there are concerns about the status of future litigation through the Courts, there is a strong case for considering whether alternative dispute resolution (“ADR”) could remove some of those uncertainties. Parties are of course entitled to explore ADR at any time but there may be a benefit in considering a dispute resolution clause which requires the parties to either resolve specific issues by ADR or at least attempt ADR before commencing proceedings.
For example, where a particular agreement is likely to give rise to issues of a technical nature, it may be prudent for the agreement to provide that such disputes must be referred to an independent expert for a binding determination. This would remove the need to refer the issue to the Court to be resolved (although this benefit only goes so far; if a party refuses to engage in the expert determination process or comply with any determination, proceedings would still need to be issued through the Court for relief).
Likewise, if the parties are required under the contract to discuss the issues in dispute (by, for example, a series of escalating meetings concluding with a meeting of Managing Directors) before proceedings can be issued, then there is perhaps a greater chance that the matter will be resolved without the need for the Court to be involved.
Arbitration: Bypass the Court
Perhaps the single most effective way to avoid the uncertainty of what cross-border litigation will look like after the next two years is to take the Court out of the equation and agree that any disputes should be referred to arbitration.
Key features of arbitration are set out below but in summary it is a process whereby parties agree that their disputes will be resolved, in a final and binding manner capable of enforcement, not by the Court but by an independent (and often international) arbitral tribunal. Arbitration and litigation have many similarities but also some key differences.
Arbitration may not be suitable in all cases (and should not necessarily be regarded as being either quicker or cheaper than litigation) but in some cases it may provide the element of certainty which is required to justify an ongoing cross-border commercial relationship.
Arbitration: key features
- Arbitration is a means of reaching a final binding determination of a dispute without referring the matter to the Court.
- Except where there is a statutory right or duty to arbitrate, the jurisdiction of the arbitral tribunal derives entirely from the contractual agreement of the parties.
- The Court will have no jurisdiction to resolve a dispute where the parties have agreed that disputes must be referred to arbitration (although the Court of the seat of the arbitration will be able to determine questions of jurisdiction).
- The parties may, by agreement, choose the seat of the arbitral tribunal, the identity or composition of the tribunal, its powers and its process. This may be by individually negotiated terms or by adoption of a particular institution’s standard procedures (such as those of the International Chamber of Commerce International Court of Arbitration).
- Arbitration may be particularly suitable for determining issues where special technical expertise is required (which explains why arbitration is so common in the construction industry).
- Decisions of the arbitral tribunal are usually final and not subject to appeal.
- Arbitral tribunal decisions are widely enforceable internationally (including in China and the United States) under a number of conventions, including the New York Convention, of which the UK is a direct contracting party.
- The complexity and costs of arbitration can vary significantly. There is no guarantee that arbitration will be quicker or less expensive than litigation, and in some cases it may be significantly more expensive. Careful consideration will need to be given as to whether arbitration would be suitable for any given agreement.
- Specialist advice is likely to be required from lawyers experienced in arbitration procedure, which may not be as easy to obtain as advice on litigation through the Court