Brexit and jurisdictional law
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How will Brexit impact the jurisdiction of the English court?
For over 40 years the English legal profession has operated within an integrated European legal system, complete with a raft of cross-border legislation and resulting case law overseen by the Court of Justice of the European Union (CJEU). The United Kingdom's decision to leave the European Union on 23 June 2016 has therefore brought with it a great deal of uncertainty for English lawyers, not least in the area of dispute resolution.
Theresa May has now confirmed that Article 50 of the Lisbon Treaty (which provides for a two-year negotiation period for the terms of the United Kingdom's exit from the European Union) will be triggered by the end of March 2017. Until Brexit, EU law will continue to bind the United Kingdom and the United Kingdom will retain access to the single market. However, uncertainty currently surrounds the integration of EU law and the four fundamental freedoms (of goods, services, persons and capital) in a post-Brexit United Kingdom.
In the absence of certainty, businesses may seek to relocate operations outside of the United Kingdom so as to retain access to the single market. Currency fluctuations may also continue (sterling remains under significant pressure following the Article 50 announcement).
Consequently, businesses have begun to conduct wholesale reviews of their commercial contracts. Going forward, we may see businesses seek to novate contracts between international affiliates, renegotiate key contractual terms or even terminate (or at least suspend performance of) their contracts. An increase in commercial disputes between contracting parties is therefore probable.
Many contracting parties habitually nominate England as the forum to hear any commercial disputes between them. England's judiciary has, over time, developed a strong reputation for commercial awareness and the system as a whole is known for its efficiency and transparency. Nevertheless, there have been concerns over whether contracting parties will continue to submit their disputes to the English court post-Brexit if the United Kingdom falls away from the existing European regime governing jurisdiction.
This article considers the current jurisdictional landscape in the United Kingdom, the United Kingdom's options post-Brexit and whether there is any substance to the concerns of contracting parties regarding the continued use of English jurisdiction agreements. While issues of governing law and judgment enforcement are also currently under scrutiny, the focus of this article is purely on jurisdiction.
Types of jurisdiction agreement
There are a range of options for jurisdiction agreements in commercial contracts. Sometimes the parties will include an exclusive jurisdiction agreement to ensure that any dispute arising under their contract will be determined in a specific jurisdiction. Some contracts incorporate one-way jurisdiction agreements (ie, permitting one party to sue in any specified or competent jurisdiction and the other to sue in one jurisdiction only) or non-exclusive jurisdiction agreements for flexibility.
The European regime
The key instrument of the European regime concerning jurisdiction (and the recognition and enforcement of judgments) in civil and commercial matters is Regulation EC 1215/2012 (Brussels Regulation Recast). The regulation applies to all member states.
The Lugano Convention 2007 extends to the European Free Trade Association (EFTA) states of Iceland, Norway and Switzerland (in addition to member states). Again, this instrument covers jurisdiction (and the recognition and enforcement of judgments) in civil and commercial matters and is based on the original Brussels regime (Regulation EC 44/2001, prior to the Recast). It is similar, but not identical, to the Brussels Regulation Recast.
There are also various other historic instruments that have been largely superseded by more recent regimes and are therefore not considered here in more detail.
The backbone of the European regime is that a defendant should be sued in its country of domicile (Article 4 of the Brussels Regulation Recast). However, a defendant domiciled in a member state may be sued in the court of another member state under certain specified circumstances (thereby taking precedence over Article 4). These include where the parties have agreed that a court of a particular member state is to have jurisdiction (Article 25), although there are exceptions to this (eg, in the case of consumer contracts).
Ultimately, the European regime is intended to provide predictability for parties in dispute.
What options does the United Kingdom have post-Brexit?
May's Article 50 announcement was coupled with the announcement of a Great Repeal Bill. The bill would repeal the European Communities Act 1972 (the act that provides for the supremacy of EU law), but at the same time seek to enshrine all existing EU law into English law.
However, this may be easier said than done. The European instruments put into place a system of reciprocity between member states (and EFTA states under the Lugano Convention) that encompasses the continued application of EU law and the jurisdiction of the CJEU.
Upon the repeal of the European Communities Act, the United Kingdom would no longer be a member state (it would be deemed a third state under the Brussels Regulation Recast - discussed in more detail below) and would no longer be bound by the CJEU. Therefore, any 'cut and paste' of the existing European instruments into national law would simply be unilateral in its effect. The United Kingdom could not simply introduce its own legislation replicating the instruments of the European regime and expect to automatically receive reciprocity as it does presently.
It would however be open to the United Kingdom to pursue an equivalent arrangement incorporating either or both of the existing European instruments, catering for its status as a third state. This has been done before; Denmark, having initially opted out of the original Brussels regime and the Brussels Regulation Recast, subsequently brought the instruments into effect by virtue of a parallel agreement with the European Union.
However, the United Kingdom would need to be willing to subject itself to the continued application of EU law and the jurisdiction of the CJEU. Furthermore, the equivalent arrangement would also require the unanimous agreement of all member states (and EFTA states under the Lugano Convention). This is likely to take time and while no one has a clear picture of how Brexit negotiations will unfold, the political climate at present suggests that discussions may be sensitive. For example, earlier in September, the Slovakian Prime Minister Robert Fico indicated that the V4 member states (consisting of Slovakia, Hungary, Poland and the Czech Republic) would look to veto any Brexit deal threatening free movement.
In any event, we have no idea where issues of jurisdictional law will fall in terms of priority on the negotiating agenda; it may be the case that they are given little to no weight at all.
At this point, the Hague Convention on Choice of Court Agreements (Hague Convention) becomes particularly relevant. The Hague Convention is an additional international treaty that came into force between member states (except Denmark) and Mexico in October 2015 (and came into force in Singapore in October 2016). The Hague Convention contains rules regarding the validity of exclusive jurisdiction agreements (and the recognition and enforcement of judgments) in civil and commercial matters. The fundamental rule is that a contracting state is required to respect an exclusive jurisdiction agreement in favour of another contracting state.
Again, the United Kingdom would cease to be a party to this instrument upon the repeal of the European Communities Act. However, post-Brexit the United Kingdom has the option to ratify the Hague Convention and it does not require the consent of other contracting states to do so. Under Article 31 of the Hague Convention, the instrument would enter into force three months after its ratification.
Alternatively the United Kingdom can, quite simply, do nothing. The English court would then look to English common law for guidance on this matter.
What are the main implications for the English court?
First, the Hague Convention does not provide for the allocation of jurisdiction in the absence of an exclusive jurisdiction agreement, whereas the Brussels Regulation Recast and the Lugano Convention both provide detailed rules (and certainty) in these circumstances. Therefore, in the event that the United Kingdom ratified the Hague Convention, we would likely see a resurgence of the English common law forum conveniens test in these circumstances.
Second, under the Brussels Regulation Recast, if parallel proceedings are commenced (known as lis pendens) in multiple member state courts, but a contract has in place an exclusive jurisdiction agreement in favour of a member state, the chosen member state court has priority to accept jurisdiction, even if it is not the court first seised (ie, the court in which proceedings are started first, as per Articles 31(1) and (2)), and the court first seised must stay its proceedings.
However, prior to the introduction of the Brussels Regulation Recast, the court first seised was given priority to accept jurisdiction, regardless of the existence of an exclusive jurisdiction agreement to the contrary. This facilitated the use of the ‘Italian torpedo’; a tactic that involves a party intentionally starting parallel proceedings in a member state before proceedings have been started in the jurisdiction nominated in the agreement, so as to delay the matter until the court first seised has decided on its jurisdiction. This is a time-consuming (and therefore costly) exercise, designed to out-price or frustrate the opposition into submission.
The Lugano Convention has not been updated to reflect the new elements of the Brussels Regulation Recast (nor are there plans on the table to do so) and therefore, under a parallel agreement incorporating the Lugano Convention into English law, the 'torpedo' would continue to be problematic.
The 'torpedo' would have no effect under the Hague Convention; under Article 6 the court of a contracting state must "suspend or dismiss proceedings" brought before it in breach of an exclusive jurisdiction agreement designating another contracting state, even if it was the court first seised. In the absence of a harmonised system, the 'torpedo' would have no place under the common law forum conveniens test (although the date proceedings were issued may ultimately have some sway).
Will the jurisdiction of the English court be respected in the absence of a harmonised system?
In the CJEU case of Owusu v Jackson (2005) it was decided that where a member state court had jurisdiction by reason of the defendant's domicile, there was no power to stay proceedings in favour of a non-member state court on the grounds it would be a more appropriate forum for the resolution of the dispute. Post-Brexit, it appears that a member state court would be bound to accept jurisdiction even if the English court, as a non-member state, was viewed as a more appropriate forum.
However, the Owusu case did not clarify whether there was a power to stay on other grounds, namely where (i) there are lis pendens in a non-member state court; or (ii) there is a jurisdiction agreement in favour of a non-member state court.
The Brussels Regulation Recast sought to address the first point with the introduction of new rules concerning third state matters. Therefore, in the event of lis pendens in a newly third state English court, a member state court would have a discretion to stay proceedings brought before it under Article 33, or under Article 34 in the event of related proceedings, if certain criteria were met. However, it is important to reinforce that this is a discretionary power. The Lugano Convention does not contain similar provisions; EFTA states may therefore look to their national laws in these circumstances.
As for the second point, in the case of Plaza BV v The Law Debenture Trust Corporation PLC (2015) (decided under the old Brussels regime), the English High Court stayed its proceedings so as to give reflexive effect to a jurisdiction agreement in favour of a non-member state court. Going forward, it may be the case that member state courts give reflexive effect to non-member state jurisdiction agreements under the Brussels Regulation Recast. EFTA states may also choose to do so under the Lugano Convention. However, in these circumstances member or EFTA states would also be at liberty to determine jurisdiction by reference to their national laws.
Post-Brexit, it is hoped that some form of harmonised system will be agreed between the United Kingdom and the remaining member and EFTA states. It is clear that the lack of a unified system has the potential to create considerable uncertainty for contracting parties. In practice, it is expected that the jurisdiction of the English court would still be respected in the majority of cases, however there would be no definitive system in place to provide the certainty that contracting parties require.
As a final point however, it is worth mentioning that if a member or EFTA state did fail to respect the jurisdiction of the English court, we could potentially see the return of the anti-suit injunction. In 2004 the CJEU declared that anti-suit injunctions were "incompatible with the system of the [European regime]" (Turner v Grovit (2004)). However, with the English court no longer bound to follow CJEU authority, an anti-suit injunction could be issued in order to prevent the continuation of proceedings in that jurisdiction.
Ultimately, the running theme here is uncertainty. The limited information we have at this stage enables us to make little more than an educated guess as to the outcome.
What we do know is that the United Kingdom has, for many years, been party to a system of jurisdictional clarity. Without this in place, the process has the potential to become much more unpredictable and for that reason, complicated and costly. It is therefore understandable that contracting parties might think carefully before designating the English court as the jurisdiction to hear any dispute going forward.
However, the English court has for a long time acted as the venue of choice for contracting parties (often for parties with little or no connection to the jurisdiction); the reasons behind this are by no means solely down to the United Kingdom's current position within the European regime. Post-Brexit, the English judiciary will retain their commercial sense approach to cases and their active case management. Brexit will not mean that the English court loses its ability to dispose of cases efficiently and with transparency.
May has now at least signalled the government's initial intentions for the post-Brexit relationship between EU law and English law. While we are a long way off receiving clarity on matters of jurisdictional law, specifically, it is predicted that the jurisdiction of the English court, in appropriate cases, is still likely to be respected.
Going forward, it is therefore predicted that contracting parties will continue to incorporate English jurisdiction agreements into their commercial contracts. However, in the absence of any uniform rules, the risk to contracting parties of jurisdictional issues arising may be greater. The degree of risk will ultimately be determined by the arrangements that are eventually put into place.
James Hall is a second-year trainee in the Sheffield office of DLA Piper.