Courting Brexit – jurisdiction and choice of law

This blog aims to provide a brief overview of the potential impact of Brexit with regard to the UK’s civil judicial cooperation with the other European Union Member States, in particular with respect to jurisdiction, recognition, enforcement and choice of law, with some added commentary on the impact on derivatives transactions.

In brief, the UK’s existing civil judicial cooperation with the other EU Member States is largely determined by virtue of its membership of the EU and its applicable regulations. The most relevant of these are the Recast Brussels Regulation[1] on jurisdiction, the Rome I Regulation[2] on choice of law relating to contractual obligations and the Rome II Regulation[3] on choice of law relating to non-contractual obligations. There are three potential scenarios – a “hard Brexit”, a “soft Brexit” and the Lugano Convention approach – each of which would have a different impact and are discussed in turn below.

Hard Brexit scenario

The first potential outcome is the so-called “hard Brexit” scenario under which the UK leaves the EU without reaching an agreement regarding its status post Brexit, reverting to the status of a non-EU country. EU regulations are self-executing and do not require national implementation by the Member States. Therefore, on the date of a hard Brexit (and end of the transitional period), the Recast Brussels Regulation, the Rome I Regulation and the Rome II Regulation will cease to apply to the territory of the UK. The potential impact of this on choice of law and jurisdiction is discussed in turn below.

Choice of law

The existing legal status of choice of law provisions in contractual matters, e.g. section 13(a) of the ISDA Master Agreement, and in non-contractual matters is currently determined across the EU Member States by the Rome I and Rome II Regulations respectively. In the event of a hard Brexit, these regulations will cease to apply to the UK, which will revert to the pre-existing common law framework. The legal status of choice of law provisions, in particular with regard to contracts, is unlikely to change significantly. Nevertheless, the UK government has already indicated its intention to incorporate the Rome I and Rome II Regulations into national legislation post Brexit, under the Great Repeal Bill. The purpose of the Rome I and II Regulations was to harmonise the choice of law provisions between the EU Member States and for this reason the UK’s proposed approach is likely to be relatively unproblematic because broadly the same outcome can be achieved in any post-Brexit UK by unilaterally adopting the principles of the regulations into national legislation.

A point to note for businesses will be that the bulk of EU law is likely to be replicated in national legislation word for word. However, post Brexit, the interpretation of this legislation will be under the jurisdiction of the UK courts as opposed to the European Court of Justice and this approach will create a scenario under which identically worded provisions could be given different interpretations by different courts. To a degree, this is already the case with some legislation. For example, many of the key provisions of EU competition law have been replicated in UK national legislation and have been given divergent interpretation by the UK courts and competition authorities. However, given that OTC derivatives, at least under the ISDA Master Agreement, are traded under either English or New York law and, should this continue to be the case in the event of a hard Brexit, this will in effect mean that the English courts and English law will take over from the ECJ the interpretation of choice of law provisions in the world of non-New York OTC derivatives trading. It should therefore be borne in mind that identically-worded choice of law provisions in favour of the laws of an EU Member State in contracts for financial instruments other than OTC derivatives may be treated differently by the ECJ.

Jurisdiction

At present, the Recast Brussels Regulation provides a relatively clear and transparent backbone for determining the scope of the jurisdiction of the English courts, particularly with regard to derivatives contracts. Unlike choice of law rules, which can largely be implemented into national legislation without major issues, this approach would not work with regard to the Recast Brussels Regulation because jurisdiction, recognition and enforcement rely on the principles of mutual recognition between different countries, thereby necessitating some form of international accord. In the absence of any such accord, the question of jurisdiction in the UK would be determined by reference to common law principles. For reasons set out below, a hard Brexit could potentially make way for considerable uncertainty as regards the jurisdiction of the English courts.

For example, a significant benefit of the Recast Brussels Regulation is that it enables the parties to a contract to elect to submit to the exclusive jurisdiction of the courts of any EU Member State while prohibiting parallel actions in other EU Member State courts. By way of example, consider a dispute between party A and party B who have agreed to submit to the exclusive jurisdiction of English courts under section 13(b) of the 2002 ISDA Master Agreement (assuming that the parties are using an up to date and valid exclusive jurisdiction clause and not the default clause under the 2002 ISDA Master Agreement). If party A starts proceedings against party B in England, but party B starts proceedings against party A in a different EU Member State in contravention of the exclusive jurisdiction agreement in relation to the same matter, then the court in England must accept jurisdiction to hear the case[4] and the court in the other EU Member State must decline jurisdiction in favour of the English court.[5] The English court must equally accept jurisdiction if party B starts proceedings in a non-EU Member State (but in this instance the regulation has no power to order the foreign court to stay proceedings or decline jurisdiction). In this regard, the Recast Brussels Regulation gives significant force to any contractual exclusive jurisdiction clause in favour of the courts of an EU Member State.

In absence of the Recast Brussels Regulation, by reference to the above example, if party A initiates proceedings against party B in an English court, the court would be required to determine under the common law rules of forum non conveniens whether it has jurisdiction, or whether a different jurisdiction would be an appropriate and more convenient alternative forum to hear the dispute instead. Nevertheless, exclusive jurisdiction clauses are given significant weight by the court and deviation usually takes place only under exceptional circumstances. However, if party B then files a claim against party A in the court of an EU Member State in contravention of the exclusive jurisdiction agreement, there is no automatic obligation under the regulation on the EU Member State court to decline jurisdiction in favour of the English court and in fact the opposite may be true if either party A or party B is domiciled in an EU Member State.

It is a fundamental principle of the regulation that (subject to its other provisions), persons domiciled in an EU Member State shall be sued in the courts of that EU Member State.[6] Although this rule is subject to arguably controversial case law, in principle, by reference to the above example, if party A was domiciled in an EU Member State and party B initiated proceedings against party A in a court in that EU Member State in contravention of the exclusive jurisdiction agreement, that court must not decline jurisdiction in favour of the English court.

Another point of contention with respect to the above is a set of new rules introduced with the Recast Brussels Regulation, which apply to proceedings commenced from 10 January 2015 onwards. These rules state that, where an EU Member State court has jurisdiction on the grounds of domicile of the defendant, but proceedings are already pending before a court of a third state (i.e. post-hard Brexit UK) at the time that the EU Member State court is seised, the EU Member State court may stay proceedings if: (i) it is expected that the court of the third state will give judgment capable of recognition and, where applicable, of enforcement in that EU Member State; and (ii) the court of the EU Member State is satisfied that a stay is necessary for the proper administration of justice.[7] Furthermore, the EU Member State court retains the discretion to continue the proceedings if: (i) the proceedings in the court of the third state are stayed or discontinued; or (ii) it appears that the proceedings in the court of the third state are unlikely to be concluded within a reasonable period; or (iii) the continuation of the proceedings is required for the proper administration of justice.

These new rules raise many questions regarding the principle of comity particularly with respect to the exclusive jurisdiction agreements in favour of the third state courts and it is currently unclear how they would be applied in practice. However, on the face of it, it would appear that, in light of the example above, if party A was domiciled in an EU Member State and party B initiated proceedings against party A in a court of that EU Member State in contravention of the exclusive jurisdiction agreement, that court may only stay proceedings in favour of any English court if the English proceedings were brought first in time and the conditions above are met. In other words, if the EU Member State proceedings were brought before the English ones, the EU Member State court would not have discretion to decline jurisdiction.

Therefore, it would seem that a hard Brexit may have potential to cause significant inconvenience to litigants going forward. In order to address this potential inequity, there has been talk of reinstating the use of anti-suit injunctions and the broad range of powers available under them to punish parties wilfully breaching exclusive jurisdiction agreements in a post-hard Brexit scenario.

Finally, it also deserves to be mentioned that it is at least arguable that the UK could continue to participate within the Recast Brussels Regulation framework by reverting to the provisions of the 1968 Brussels Convention[8] – an earlier iteration – to which the UK acceded in 1978. However, as between the EU Member States (including the UK), the Brussels Convention was superseded by a subsequent Brussels Regulation[9] i.e. the predecessor to the Recast Brussels Regulation, and there is no guarantee that this recourse would be successful or even desirable.

Soft Brexit scenario

The second potential outcome is that the UK government reaches an agreement with the EU, i.e. “soft Brexit”, under which certain EU laws would continue to apply in the territory of the UK, likely with continued oversight by the ECJ. Any such agreement may also include matters relating to the Recast Brussels Regulation, Rome I Regulation and Rome II Regulation within its scope – although the latter two can in any event be transposed into national law just like in the case of a hard Brexit. Under this scenario, there is likely to be little to no impact on derivatives transactions as far as jurisdiction is concerned and business is likely to continue as usual (subject to the continued application of other relevant regulations). However, actual analysis can only be carried out once the details of any agreement are published.

The Lugano Convention scenario

The third potential outcome is that the UK government continues to participate within the EU jurisdictional framework by virtue of seeking to rejoin the 2007 Lugano Convention[10] (of which it is currently a member by virtue of EU membership) which, broadly speaking, extends the scope of the Brussels Regulation (the earlier iteration of the Recast Brussels Regulation) to the EFTA states of Norway, Iceland and Switzerland. The Lugano Convention scenario is in principle available in combination with a hard Brexit scenario, as well as any soft Brexit scenario that does not touch on jurisdiction. The Convention does not deal with matters relating to choice of law so these would need to be implemented separately.

It can be seen in the Parliamentary report The implications of Brexit for the justice system: Government Response to the Committee’s Ninth Report of Session 2016–17[11] dated 13 December 2017, that the House of Commons Justice Committee wrote to the government: “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 outlined its intention to continue to participate in the Lugano Convention. In principle, this scenario would be a relatively effective and expedient solution to many of the issues relating to jurisdiction post Brexit already addressed in this blog, because it would entail joining a pre-existing framework with which the UK is already familiar and there would be no need to negotiate a bespoke solution. However, there are nevertheless some difficulties with and drawbacks to this approach.

Potential political issues

The first political hurdle is that accession to the Convention will require the approval of all contracting parties to the Convention,[12] i.e. the EU, Iceland, Norway, Switzerland and Denmark,[13] unless the UK becomes an EFTA state post Brexit.[14] Although the negotiations would be spearheaded by the EU, likely within the context of already on-going Brexit negotiations, there would also be the added risk of any agreement being scuppered by any of the other contracting parties. There have been no new joiners thus far and, if the UK did accede, it would be the only non-EU/EFTA party to the Convention.

The second political hurdle is the jurisdiction of the ECJ. The Recast Brussels Regulation is EU law and subject to the sole jurisdiction of the ECJ. By contrast, the courts of all contracting parties to the Convention have concurrent jurisdiction to interpret the provisions of the Convention with a duty to “pay due account” to the jurisprudence of each other’s courts.[15] This approach has been controversial because to date it has led to the creation of divergent case law in the different jurisdictions. It has also been argued that there would be an even greater potential for divergent legal interpretation with the UK’s membership because the UK would be the only common law jurisdiction contracting party. Given the global prominence of the jurisdiction of the English courts, in particular with regard to derivatives, this approach may very well lead to the creation of a parallel strand of case law through the English courts on the interpretation of what is, in essence, an instrument of EU law, and to which the courts of other contracting parties, including the ECJ, would have to “pay due account”. The potential for this outcome is significant given the existing formidable array of jurisprudence from the English courts dealing with matters of jurisdiction (which have not been tested in EU courts and are under the existing framework limited to application in England only). For these reasons, it is possible that the EU would prefer to instead pursue an approach akin to the status quo under the Recast Brussels Regulation under which it retains full jurisdiction over the interpretation of jurisdiction as between the UK and the other Member States – for which the Lugano approach in its existing form is unsuited.

Legal shortcomings

In addition to the issues highlighted above, a number of shortcomings arise from the fact that the Convention, broadly speaking, incorporates the provisions of the Brussels Regulation – the predecessor to the Recast Brussels Regulation – and has not adopted the reforms introduced by the successor. If and until these changes are implemented to the Lugano Convention, their benefits could not be reaped under English jurisdiction. The most significant of these reforms relate to the conduct of parallel proceedings in different EU Member States (so-called lis pendens rules) and the requirement for at least one party to the contract to be domiciled in an EU Member State in order to be able to benefit from the protections afforded to exclusive jurisdiction agreements by the regulation.

The Recast Brussels Regulation introduced a new rule stating that, where the parties have agreed to submit to the exclusive jurisdiction of a particular court or EU Member State, when that court is seised, any other court in any other EU Member State must stay proceedings until such a time as the court specified in the exclusive jurisdiction agreement resolves the issue of jurisdiction.[16] By contrast, the position under the Lugano Convention is that any court other than the court first seised has to stay proceedings until the court first seised determines whether or not it has jurisdiction.[17]

By way of an example, reusing the example from earlier on in the blog, consider a dispute between party A and party B who have agreed to submit to the exclusive jurisdiction of the English courts under section 13(b) of the 2002 ISDA Master Agreement (again assuming that the parties are using an up to date and valid exclusive jurisdiction clause and not the default clause under the 2002 ISDA Master Agreement). In this example, party B files a claim against party A in the court of an EU Member State[18] in contravention of the exclusive jurisdiction agreement. Party A then files a claim against party B in the English courts. Under the Recast Brussels Regulation, when the English court subject to the exclusive jurisdiction agreement is seised, the court in the other EU Member State must stay proceedings. By contrast, under the Lugano Convention, because the court in the EU Member State was the first court to be seised, the English court must stay proceedings until the EU Member State court declines jurisdiction. The ultimate outcome will be the same under both regimes – the EU Member State court must decline jurisdiction and the English court must accept jurisdiction – but in the context of exclusive jurisdiction agreements the new rules give priority to proceedings started the court specified in the exclusive jurisdiction agreement.

The changes to the Recast Brussels Regulation were introduced to counter so-called “Italian Torpedo” actions by which a party anticipating legal proceedings would file a claim for a negative declaration in the court of an EU Member State which would take a notoriously long time (often several years at a time) to resolve issues of jurisdiction in order to delay and disrupt the proceedings.

Another important reform introduced under the Recast Brussels Regulation was the removal of the requirement that at least one party be domiciled in an EU Member State in order for the regulation’s rules relating to exclusive jurisdiction clauses to apply. The implications of this change are mainly procedural and carry with them significant time and cost savings.

Among other relevant changes, the Recast Brussels Regulation also made it easier to recognise and enforce court judgments from one EU Member State in another by replacing the “exequatur” system of declarations of enforceability with a simplified, standard form certificate to be served with a copy of the original judgment.

It should be noted that some or all of the issues identified with the UK’s potential accession to the Convention could be addressed by implementing changes to the text of the Convention. For example, in September 2013, the Lugano Convention Standing Committee considered revising the provisions of the Convention so as to bring them in line with the Recast Brussels Regulation, but made no further recommendations. More significant changes, such as giving the ECJ sole jurisdiction to interpret the provisions of the Convention, would no doubt entail more protracted and heated negotiations between the parties to the Convention.

Conclusion

In light of the above it should be borne in mind that there is a potential for significant divergence under the various Brexit scenarios principally with respect to the jurisdiction of the English courts but also with regard to the future application of any choice of law provisions. Initiatives are currently underway to prepare alternative ISDA documentation under French and Irish laws in order to fill any gaps in the post-Brexit legal sphere. However, despite any appearances to the contrary, it is overwhelmingly likely that the UK government is doing their utmost to ensure the post-Brexit continuity of London as the pre-eminent financial and legal centre on this side of the Atlantic, with consequent resolution of the above issues. However, rather than live in hope, financial institutions should ensure that their house is in order and that their transactional framework documentation can withstand the impact of any Brexit scenario with minimal risk.

[1] REGULATION (EU) No 1215/2012 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (recast).

[2] REGULATION (EC) No 593/2008 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 17 June 2008 on the law applicable to contractual obligations (Rome I).

[3] REGULATION (EC) No 864/2007 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 11 July 2007 on the law applicable to non-contractual obligations (Rome II).

[4] Article 25 of the Recast Brussels Regulation.

[5] Article 31 of the Recast Brussels Regulation.

[6] Article 4 of the Recast Brussels Regulation.

[7] Articles 33 & 34 of the Recast Brussels Regulation.

[8] Convention on jurisdiction and enforcement of judgments in civil and commercial matters.

[9] COUNCIL REGULATION (EC) No 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters.

[10] Convention on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters.

[11] The implications of Brexit for the justice system: Government Response to the Committee’s Ninth Report of Session 2016-17, Third Special Report of Session 2017-19, 13 December 2017

[12] Articles 70 & 72 of the Convention.

[13] Denmark opted out of implementing EU regulations under the area of freedom, security and justice. Denmark subsequently implemented the provisions of the Brussels Regulation and the Recast Brussels Regulation through a separate agreement with the EU; however, it is also a signatory state to the Lugano Convention.

[14] Articles 70 & 71 of the Convention.

[15] Protocol II, Article 1 of the Convention.

[16] Article 31 of the Recast Brussels Regulation.

[17] Article 27 of the Brussels Regulation.

[18] For ease of reference, the Lugano Convention contracting parties are also referred to as EU Member States.

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