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Farrer & Co | Cross-border disputes post Brexit – UK Government's proposed legal framework

Last week the Government published a series of position papers designed to address key issues in the Brexit negotiations. As the countdown to March 2019 continues, British businesses and financial services have been seeking assurances from the Government as to what a post-Brexit world will look like. One key issue on which these sectors understandably require more certainty is the legal framework which will govern the interaction between different legal systems in cross-border situations after the UK leaves the EU. The third position paper published last week sets out the Government's stance on civil judicial cooperation and begins to address these concerns.

The paper, entitled Providing a cross-border civil judicial cooperation framework, acknowledges that "businesses and investors value certainty". The Government recognises that the current international arrangements in the EU enhance confidence in cross-border commercial contracts and investment relationships, particularly in relation to (i) which country's courts hold responsibility for resolving disputes; and (ii) the enforcement of resulting judgments in other countries where a party has assets.

The paper cites the considerable co-operation that currently exists across both civil and family matters, whilst also referring to specific legislation regarding cross border insolvencies and restructurings.

Why is this important?

Contractual parties need to be able to assess whether their jurisdiction clauses will be upheld and whether they will be able to enforce UK judgments across the EU. Businesses want to know that when they trade with each other they will be able to resolve disputes swiftly and that they will be able to enforce a judgment obtained in one EU Member State in any other jurisdiction across the EU.

Parties negotiating a contract will therefore usually agree which court will have jurisdiction to hear any dispute arising out of the contract and which country's law will apply. EU initiatives have harmonised many of the cross-border litigation rules applicable across the EU with the effect that businesses can be reasonably certain that litigation will not mushroom in multiple jurisdictions and that judgments will be freely circulated and enforced among Member States.

The Government has faced criticism from some quarters for failing to set out a plan for how civil justice cooperation of the type dealt with by the current regime will work post-Brexit.  Earlier in the year the House of Lords European Union Committee expressed a concern that "without adequate alternative arrangements post-Brexit there will be great uncertainty for UK businesses and citizens".

The Government's paper is important because it recognises the need to maintain confidence in cross-border trade by ensuring that there is a coherent framework of rules to govern interactions between legal systems following Brexit and because it begins to sketch out how that framework might work.

What does the Government's paper say?

In short, the Government advocates more of the same: "The UK… will seek an agreement with the EU that allows for close and comprehensive cross-border civil judicial cooperation on a reciprocal basis which reflects closely the substantive principles of cooperation under the current EU framework."

It notes that:

"…citizens and businesses need to have continuing confidence as they interact across borders about which country’s courts would deal with any dispute, which laws would apply, and know that judgments and orders obtained will be recognised and enforced in neighbouring countries, as is the case now."

Choice of law

In the context of civil and commercial matters the paper refers to the Rome I and II Regulations which govern choice of law in contractual and non-contractual matters.

The Government is clear that following withdrawal from the EU, it intends to incorporate into domestic law the Rome I and II instruments. This had been anticipated by legal commentators as these regulations do not require reciprocity. The effect would be that EU Member States will after Brexit continue to uphold an express choice of English law to govern contractual and non-contractual obligations on the same basis as previously. Similarly, English courts would continue to uphold choice of law clauses requiring the application of foreign laws.

Jurisdiction and enforcement

The paper acknowledges the Brussels Recast Regulation which contains harmonised rules of jurisdiction and enforcement of judgments. However, other than an express intention to agree a framework "which would mirror closely the current EU system", the paper says very little about how such a regime would be achieved.

The problem which the Government has is that the Brussels Recast Regulation requires reciprocity. This means that, if the Government were simply to enact this legislation into English law, judgments from the remaining 27 Member States would be enforced in England, but the remaining 27 would not be required to enforce English judgments in their jurisdictions.   

This suggests that an agreement with the remaining 27 Member States to continue to apply the Brussels Recast Regulation would therefore be essential for such legislation to continue to have any practical effect. Such agreement is likely to be difficult to achieve for a number of reasons, including the need for unanimity among the remaining Member States. 

However, the main sticking point is likely to be that the Regulation is subject to the jurisdiction of the Court of Justice of the European Union (CJEU) and that an agreement along these lines would effectively involve the partial retention of rules of European law. The Government has repeatedly pledged to end the jurisdiction of the CJEU.

Lugano and Hague Conventions

The paper is low on specifics but it does list a number of international agreements including the Lugano and Hague Conventions. These references give at least an indication of the Government's thinking in terms what the international framework might look like post Brexit.

The UK currently participates in the 2007 Lugano Convention and 2005 Hague Choice of Court Convention by virtue of its membership of the EU. The position paper makes it clear that the Government intends for the UK to continue to participate in these conventions after it leaves the EU.

The Lugano Convention forms the basis of the UK's civil judicial cooperation with Norway, Iceland and Switzerland. It provides an almost parallel system of recognition and enforcement of judgments. The paper does not go into any detail on the mechanics of the continued participation. However, the implication is that the UK might seek an agreement to apply the Lugano Convention to relations with the remaining Member States (as well as Norway, Switzerland and Iceland) after it leaves the EU.

The 2005 Hague Convention aims to ensure the effectiveness of exclusive choice of court agreements between parties to international commercial transactions. The Government recognises that the 2005 Convention's civil and commercial coverage is limited when compared to the Brussels Recast Regulation.

However, the reference here could suggest an intention that the UK ratify the 2005 Convention after Brexit.

Conclusion

As the Brexit negotiations continue, there are clearly a number of hurdles to overcome if the objectives set out in the Government's position paper are to be achieved. For example, whilst a separate agreement to apply the Lugano Convention may be an attractive means of harmonising rules on jurisdiction and enforcement, it is by no means a forgone conclusion. This is not least because the mechanism for non-Member States acceding to the Lugano Convention requires the agreement of its contracting states which, of course, include the remaining 27 Member States.

The UK Government has now set out its general position and preferences for the direction for future negotiations but a lot is now dependent upon the reaction from the EU. The UK Government may wish to put in place a system that closely resembles the status quo, with the English Courts being the preferred destination for various cross-border and pan-European disputes, but that depends on reciprocity and whether the EU is prepared to adopt this model in circumstances where Britain is outside the EU and the jurisdiction of the CJEU. Even if the EU is willing to agree to the spirit of the paper a lot more work will be required to agree the necessary legislation. The paper therefore represents a first step in what may well to be a lengthy journey.

What is clear is that whilst this paper looks at some of these issues at a very high level, the substance under discussion will be key to how cross-border agreements are structured at the outset and then litigated if a dispute arises. These issues are of great significance to our clients, who constantly operate across borders, and we will therefore be keeping a close eye on the detail and will provide further updates in due course. 

If you require further information on anything covered in this briefing please contact David Fletcher(david.fletcher@farrer.co.uk, 020 3375 7117), William Charrington (william.charrington@farrer.co.uk)  or your usual contact at the firm on 020 3375 7000. Further information can be found on the Brexit page of our website.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, August 2017

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