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Article: September 2016: EU Litigation Update

September 01, 2016
Business Litigation Reports

Brexit, Jurisdiction, and Choice of Law: Plus Ça Change? For lawyers schooled in the idioms of Brexit, there is, in addition to the so-called “four freedoms” (for the free movement of goods, services, people and capital throughout the Member States of the European Union), a fifth freedom to consider: the free movement of judgments. Has the United Kingdom’s vote to leave the EU put that freedom at risk? As the rules applicable in Member States to choice of law questions in contract and tort are also harmonized at the EU level, one of the few certainties of Brexit is that the UK’s private international law framework faces the prospect of far reaching change in the months and years to come. Or does it?

Although perhaps not often discussed outside the corridors of London’s leading law firms and barristers’ chambers, one of the main achievements of the EU single market is that judgments of the English courts in civil and commercial matters may be enforced in all of the EU’s 28 Member States as though they were judgments of the host state’s court system. This occurs pursuant to a harmonized set of jurisdictional rules applied by courts from Dublin to Bucharest which was first established in 1968 (the so-called “Brussels Regime”).

As originally drafted, the Treaty of Rome, which founded the then European Economic Community in 1957, did not enable the European institutions to legislate in civil justice matters. The rules of the Brussels Regime were therefore contained in a stand- alone treaty between the EEC Member States called the Brussels Convention. The UK acceded to the Brussels Convention in 1978, incorporated it into its domestic law in 1982, and began applying it in 1987. After the EU gained the power to legislate in civil justice under the 1997 Treaty of Amsterdam, the Brussels Convention was replaced by Regulation 2001/44/EC (the “Brussels Regulation”). In 2012, the Brussels Regulation was itself amended and replaced by Regulation 2012/1215/EU (the “Recast Brussels Regulation”).

From the UK’s perspective, while the Brussels Regulation and the Recast Brussels Regulation made some significant changes to their respective predecessors, the Brussels Regime’s core function— to allocate jurisdiction in any case where it applies exclusively to the courts of a single, identified EU Member State, and to provide for the automatic recognition and enforcement of any judgment or order given by such courts throughout the EU—has remained unchanged for the last 30 years. However, when the UK leaves the EU, the UK’s membership in the Brussels Regime will cease, and the enforceability of an English judgment in the continuing EU will be governed by the rules for recognizing and enforcing foreign judgments under each EU Member State’s national laws.

The Brussels Regime has been criticized in some quarters for the rigidity and inflexibility of its approach. It is also said to work injustice in particular cases and, perhaps surprisingly in view of the importance its framers placed on certainty and predictability of outcomes, has given rise to a remarkable amount of litigation over jurisdictional issues. Overall, however, the consensus view is that the English legal system has benefited from being part of it. This is because it has assisted English lawyers in advising international parties on their interests in the EU, and in turn on their disputes, wherever those parties might be from. In doing so, English lawyers have also been buttressed by knowing that the traditional priority given by the common law to party autonomy with respect to freely expressed contractual choices of governing law would, by reason of European regulation, also be respected by the courts of other Member States. This is so even where the legal systems of those States might previously have required host State law to apply.

As with the Brussels Regime, the then EEC’s harmonized rules on contractual choices of law were originally contained in a stand-alone treaty signed in1980 called the Rome Convention. In 2008, the Rome Convention was replaced by Regulation 2008/593/EC (the “Rome I Regulation”). Pursuant to Regulation 2007/864/EC (the “Rome II Regulation”), the scope of harmonization at the EU level was expanded to include common choice of law rules across the Member States for tortious obligations as well.

As commercial parties and their lawyers adjust to the realities of Brexit, there will be some constants from which they will be able to draw comfort. Of these, one practical point is that, whatever the changes to the jurisdiction and choice of law frameworks in the longer term, there will be no immediate changes to those frameworks in the short term. This is because, until the UK actually leaves the EU, it remains subject to, and continues to benefit from, EU law. More importantly, the substantive rules of English private law, which contracting parties find highly attractive, will also not be affected by the UK’s vote to leave. Since the EU rules for choice of law under the Rome I and Rome II Regulations will remain in force in the continuing EU, and as the fundamental approach of the English courts towards choice of law issues is unlikely to change much, it is likely that the rights and obligations of parties who contract under English law will continue to be respected and given effect by courts in England and the continuing EU as and when the UK’s exit from the EU takes effect, even if the (currently European) derivation of those rules alters.

As regards the future enforceability of English judgments in the continuing EU, the picture is complex, but the range of possible outcomes upon any UK exit is tolerably clear. For example, if the exiting UK wants to remain part of the existing EU jurisdictional scheme, it could apply to join the Lugano Convention, which effectively incorporates the EEA and EFTA Member States (currently, Norway, Switzerland, Liechtenstein and Iceland) into the EU for jurisdictional and mutual recognition and enforcement purposes. In the unlikely event that the government deemed that undesirable (or possibly, if the continuing EU vetoed the UK’s accession), the UK may be able to replicate many of the benefits by acceding unilaterally to the Hague Convention on Choice of Court Agreements (the “Hague Convention”). This treaty, which entered into force on October 1, 2015 as between all EU Member States (except Denmark) and Mexico, prescribes rules regarding the validity and effect of jurisdiction agreements, and the subsequent recognition and enforcement of a judgment given by a court of a contracting state designated by such an agreement. Accordingly, if the UK joined the Lugano or Hague Conventions, judgments given by the English courts pursuant to a choice of court agreement would remain entitled to recognition and enforcement across the continuing EU. In what may be something of a “win- win” in that event, English courts may also regain the flexibility they enjoyed at common law to do justice in individual cases by declining jurisdiction on forum non conveniens grounds and, where appropriate, to issue anti-suit injunctions to restrain vexatious or oppressive foreign proceedings, both of which are prohibited under the Brussels Regime. For new transactions, or in the case of transactions where a dispute has not arisen, yet another alternative would be for parties to agree to arbitrate their disputes, thereby avoiding any uncertainty. This is because the recognition and enforcement of arbitral awards will remain subject to the tried and tested rules prescribed by the New York Convention, to which all EU Member States are party. The ultimate fall back would be to revert to a system where the recognition and enforcement of EU court judgments in England, and of English court judgments in the EU, would be governed solely by the common law and by the national laws of each Member State. This would surely add time, cost and uncertainty to the enforcement process, and may mean that obtaining an English judgment for enforcement in the continuing EU becomes much less attractive in the future. An extreme outcome of this kind is probably unlikely, however. This is because legal services are valuable not only to their many and varied global users, but also, importantly, to the UK economy. It is therefore likely that the government formed by the new Prime Minister, the Rt Hon Theresa May MP, will want to find a way to avoid throwing the legal baby out with the bathwater.

As regards choice of law, as stated above, the consensus view is that the outcomes in most cases are also unlikely to change substantially. Nevertheless, unless the government takes steps to preserve the status quo upon the UK’s exit, departure from the EU may mean that choice of law issues in contract will go back to being governed by common law rules which last applied before 1991, when the Rome Convention entered into force in the UK. As the Rome II Regulation entered into force in 2009, choice of law issues in tort have only been governed by EU law for the last 7 years. It follows that the pre- existing rules (prescribed by the Private International Law (Miscellaneous Provisions) Act 1995), will be more familiar to the current generation of practicing lawyers. One disadvantage may be that the ability of parties under the Rome II Regulation to choose the law that governs any tortious obligations which arise would be lost, however. English law will also default to the rule that the governing law of the tort is the law of the place where the events giving rise to the tort occurred (under the Rome II Regulation, the default rule is that a tort is governed by the law of the place where the damage is suffered). But, as the damage caused by a tort will usually be suffered where the events constituting the tort occur, this is again unlikely to make much difference in most cases.

For commercial parties entering into transactions during the twilight period of the UK’s membership of the EU, the key question will be to consider what the forum selection and choice of law provisions in a given contract are trying to achieve. If enforceability throughout the continuing EU is important, an exclusive (as opposed to a non-exclusive) choice of English court jurisdiction should suffice to guarantee that outcome, given the likelihood that the UK will accede to the Hague Convention. Tactically, an exclusive choice of English court jurisdiction may also assist if, post-Brexit, it becomes necessary to seek anti-suit relief from the English courts to halt abusive parallel proceedings in a slower-moving EU jurisdiction (the so-called “Italian torpedo”). Where continuing enforceability is an absolute priority, however, agreeing to arbitrate disputes is likely to be the safest course.

As to choice of law, parties are probably best advised to continue with their pre-existing approaches. Nevertheless, depending on the context, they may wish to negotiate provisions, such as material adverse change clauses, which would entitle them, e.g., to accelerate a loan or to terminate an ongoing obligation to perform, if the UK’s exit from the EU makes the contract unworkable, or otherwise caused the balance of risk and reward under the contract to change substantially.

In both jurisdiction and choice of law, then, Brexit will almost certainly lead to changes to the rules, but the overall nature of the game, and the outcomes to which it leads, should remain similar. These changes may create some uncertainty and, in some cases, may also create opportunities for disputes lawyers and their clients. However, the importance of the legal services sector to the UK should mean that, in this field at least, the government will want to maintain continuity. The upshot is that commercial parties can probably plan on the basis that English court judgments, and contractual choices of English law, will continue to be recognized and enforced in the continuing EU. They would however be well advised to consider the issues that may arise and, when concluding new contracts, address or mitigate any Brexit-related contingencies expressly.

After Brexit: What Is the Fate of the Unitary Patent Court? One of the many questions Brexit raises is that of the future of the Unitary Patent (“UP”) and the associated Unitary Patent Court (“UPC”). Even though the Unitary Patent Agreement (“UPCA”) is not part of the EU legal regime but— like the European Patent Convention—a separate international treaty between countries, it will still be heavily affected by Brexit and the uncertainties arising during the transition period which will last for at least two years.

In order to enter into force, the UPCA needs to be ratified by 13 Member States including the three Member States in which the most European Patents had effect in 2012. This is Germany, France and the UK, with Italy being next in row. Thus, as long as the UK has not lost its member status, its ratification is required for the UPC to assume its tasks. Ratification by the UK was originally expected by the end of 2016 but there are severe doubts whether there still is a political will to do so after the vote. If the UK does not ratify the UPCA, the Agreement cannot enter into force until the UK loses its status as a Member State and Italy replaces the UK as the third mandatory signatory. After that point, ratification by the UK will not be possible anymore, because pursuant to Art. 84 UPCA accession is only open to EU Member States.

In a case where the UK ratifies the UPCA while still being a Member State, the question of what will happen once it loses that status arises. The limitation in Art. 84 UPCA was included after the European Court of Justice (“ECJ”) held that the supremacy of EU law has to be guaranteed which requires, in particular, that the ECJ must retain the competence under Art. 267 TFEU to issue binding preliminary rulings on questions of EU law. While there might be legal means to secure the supremacy of EU law also vis-à-vis non-EU members, any solution would above all depend upon the willingness of the UK to remain to a certain extent subjected to EU law and the rulings of the ECJ under Art. 267 TFEU after leaving the EU.

In conclusion, Brexit does not mark the end of the Unitary Patent project, but certainly it is a setback. In light of the many unresolved issues and eventually necessary amendments to the legal framework, it currently seems highly unlikely that the UPC will open its doors and those of its London branch anywhere in the near future.