View from the UK: Post-Brexit English jurisdiction and governing law clauses/increasing criminalisation of business conduct
Many financial institutions choose English governing law and jurisdiction clauses in their finance agreements. In doing so, they benefit from the certainty and commerciality of English contract law and the impartiality and technical expertise of the English judiciary. We have already written in the Risk Note about how Brexit might impact these choices.
Post-Brexit jurisdiction and governing law clauses
Recently, two important reports have been published which provide some clues as to what two key UK Parliamentary committees recommend for the UK Government’s negotiating strategy for a post-Brexit UK civil justice system.
The House of Commons Select Committee on Justice published its report on 17 March 2017 (HC Report) on the implications of Brexit for the justice system. The report summarises the evidence put before it (including quoting from Allen & Overy’s evidence, which we submitted towards the end of last year) and sets out a series of recommendations as to how the Government should approach negotiations with the EU in this area. Separately, the EU Justice Committee of the House of Lords also published a report (HL Report) on 20 March 2017 summarising oral evidence given to it on the same issues and making its own recommendations to the UK Government.
The conclusions and recommendations expressed by both Committees are very helpful and consistent with our views and those expressed by various industry bodies. In particular, the House of Commons Select Committee recommends that “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 HC Report recommends that:
- The UK Government should aim to negotiate an agreement to replicate the provisions of Brussels I Recast (the EU Regulation which contains rules on court jurisdiction and the recognition and enforcement of judgments) as closely as possible. As a minimum, the HC Report suggests that the UK must endeavour to negotiate membership of the 2007 Lugano Convention (which is almost identical to the pre Recast Brussels Regulation and currently applies between the EU Member States and Switzerland, Iceland and Norway) and sign up to the 2005 Hague Convention (which deals with jurisdiction and enforcement of judgments in Contracting States in relation to contracts where there is an exclusive jurisdiction clause) in its own right.
- Rome I and II (the EU Regulations which contain rules determining the applicable law of contractual and non-contractual obligations respectively) should be made part of English law.
The HC Report also recognises that there are special concerns in the law of banking and finance, “which is a significant field given the importance of that sector to the UK economy”. It highlights a concern expressed during the consultation that banks, insurers and other such organisations with contractual obligations to perform functions requiring authorisation from EU institutions may find that they are prohibited from performing if their authorisation lapses. There is a similar risk in relation to organisations that find they do not meet UK authorisation requirements post-Brexit. The HC Report refers to areas of uncertainty including derivatives, insurance and revolving credit agreements.
Some of the evidence submitted to the Committee during the Inquiry suggests that the result of this is that parties may find themselves in breach of contract post-Brexit. The HC Report notes that if obligations are rendered impossible to perform, this is unlikely to be a defence to a claim for breach of contract, making those parties liable in damages. In practice, however, many affected finance contracts will include express provisions addressing the issue (such as prepayment or early termination provisions) meaning that parties will not be required to perform if performance is illegal, so the legal risks are likely to be mitigated.
A commercial risk does, however, remain in that the consequences of prepayment, early termination or similar provisions may be equally unattractive for the parties to a finance contract.
As the HC Report recognises, the uncertainty may be a disincentive to EU parties entering into financial contracts with UK parties. The HC Report concludes that clear transitional agreements will be required in this area.
As for the role of the Court of Justice of the EU (CJEU), the HC Report acknowledges that the end of the substantive part of the CJEU’s jurisdiction in the UK is an inevitable consequence of Brexit. Ideally, the HC Report states, the UK and the EU could continue their mutually beneficial cooperation without placing any binding authority at all on the CJEU’s rulings. The HC Report suggests that “a role for the CJEU in respect of essentially procedural legislation concerning jurisdiction, applicable law, and the recognition and enforcement of judgments, is a price worth paying to maintain the effective cross-border tools of justice discussed throughout our earlier recommendations.”
Whilst the views expressed in these reports are very positive, it is unclear to what extent they will be adopted by the UK Government. The HL Report refers to evidence from the UK Government which suggests that: (a) there is still some way to go in persuading at least some in UK Government that a reciprocal regime on jurisdiction/enforcement should be a priority in the Brexit negotiations; and (b) any suggestion that the CJEU might have a role continues to be a significant sticking point. The HL Report states that the Committee “was unable to discern a clear government plan as to how the continued post-Brexit operation of these important Regulations will be secured. The Minister also referred to the utility of the Great Repeal Bill, but it is not clear how this could possibly deliver the reciprocity that is necessary for the functioning of these Regulations. We conclude that either the Government has decided not to make its position public or, as yet, has not taken full account of the impact of Brexit on the areas of EU law that these Regulations cover.”
It is hoped that the publication of these reports will encourage the UK Government to recognise the importance of seeking to negotiate a regime for the continued reciprocal recognition of jurisdiction clauses and enforcement of judgments between the UK and the EU post-Brexit, both during and after transition. Similarly, it is hoped that the EU 27 will recognise the benefit that its businesses and citizens gain from the continued mutual application of this regime.
Criminalisation of business conduct
Pressure is growing on companies doing business in the UK (whether or not they are UK domiciled) to monitor even more carefully who they do business with, and who does business on their behalf. There is a trend towards the increasing regulation and criminalisation of business conduct.
The UK government is pushing ahead with its plans to extend the scope of corporate criminal liability to cover more economic crimes. At present, a corporate can be held criminally liable for a failure to prevent bribery by an employee or other representative under s7 Bribery Act 2010. A Call for Evidence issued in January by the UK Ministry of Justice puts forward five options for reform in this area – including extending this “failure to prevent” model to other types of economic crime, such as fraud, false accounting and money laundering. The interplay between any new laws and the current regulatory regime will need to be considered carefully – a financial institution, already subject to complex financial regulation, must be able to know what type of misconduct elevates any wrongdoing from a regulatory breach to a criminal offence.
We expect the new offence of “failure to prevent the facilitation of tax evasion” contained in the Criminal Finances Bill, to come into force in the next six months. The financial services sector is considered a riskier sector for this new offence, and the offence applies very broadly – a corporate can be liable for a failure to prevent facilitation of tax evasion by an employee or any third party acting on the entity’s behalf, and for both UK and foreign tax evasion. Financial institutions need to be ready in advance of this offence coming into force as the only defence is having “reasonable” procedures in place.
Separately, the UK Office for Financial Sanctions Implementation (OFSI) has issued guidelines on the new monetary penalty regime for breach of financial sanctions (contained in Part 8 of the Policing and Crime Act 2017 – Part 8 came into force on 1 April 2017). The guidelines provide an early insight into OFSI’s proposed priorities and methods, and highlights what is expected to be a more active sanctions enforcement regime in the UK.
Against this backdrop of increasing criminalisation of business conduct, the news in February that there is not going to be any appeal of the High Court’s ruling in the RBS Rights Issue litigation last December, which put a renewed spotlight on privilege issues during investigations, was disappointing. The High Court ruled that interviews conducted by a bank’s solicitors with its employees were not covered by legal advice privilege as the employees were not part of the “client” for privilege purposes. It had been hoped that the Supreme Court would hear an appeal, as the High Court judge had granted a “leap frog” appeal. However the appeal has been withdrawn. The decision leaves banks in a difficult position should they want to carry out internal investigations and then rely on privilege to refuse to disclose documents created during those investigations. We have been considering a range of approaches that our clients may wish to take as a result of this decision, but there is a real tension here between the English courts’ restrictive approach to privilege and the need among financial institutions to fully investigate potential issues without exposing themselves to unnecessary legal risk.
Finally on the investigations front, the news in January that Rolls Royce entered into a Deferred Prosecution Agreement (DPA) with the UK SFO in relation to widespread historical bribery and corruption in a number of jurisdictions, and related public statements made by the SFO, provided some further clues as to which characteristics of a defendant, or a case, might make it more likely that a DPA will be offered. Rolls Royce had shown “exceptional” cooperation during the investigation and thus qualified for a DPA even though it had not initially self-reported (the SFO started its investigation following information contained on a public blog).
This case summary is part of the Allen & Overy Legal & Regulatory Risk Note, a quarterly publication. For more information please contact Karen Birch – or tel +44 20 3088 3710.