Should Brexit affect the popularity of English governing law and jurisdiction clauses?
A number of clients have been asking questions about whether Brexit should impact their approach to negotiating governing law and jurisdiction clauses in commercial contracts. For the reasons explained below, our conclusion is that in the vast majority of cases in the commercial context, Brexit should not require parties to move away from their current approach to negotiating governing law and jurisdiction clauses in their contracts.
There are a range of different factors which come into play when parties choose a governing law. For some parties, the decision might be driven by a desire to choose a law that is particularly familiar or convenient (for example it might be the law of their home jurisdiction or the law under which they have previously contracted). For others, the decision may be driven by an assessment of how commercial or predictable the relevant law might be (so for example they might want the predictability of knowing that the relevant law permits immediate acceleration of repayment obligations or immediate enforcement of security). A desire to insulate a contract from the application of a potentially unhelpful law may also drive some parties – for example they might want to avoid the law of their counterparty's home jurisdiction.
For many parties a combination of these and other factors might be relevant.
Why has English law historically been a popular choice?
English law has historically been a very attractive choice for commercial parties in the context of international transactions and in particular for creditors. This is because English law is one of a number of laws (including New York law) that is generally viewed as being comparatively predictable and certain. English law will give effect to contractual bargains. Parties know that contracts are interpreted literally in the business context, so acceleration and security provisions are effective, market disclaimers and non-reliance language work where sophisticated parties are involved, and the scope for terms to be implied or for principles of public policy or looser doctrines of good faith or fair dealing to overwrite what has been agreed is limited.
There is also a strong body of English case law that parties can rely on to assess how their agreement will be interpreted and applied.
The flexibility of the English law system is also attractive to some parties – the common law system allows the law to develop and grow to deal with innovative deal structures and changes in the commercial environment (although again English law is not alone in this regard).
Finally, English law is also familiar to many parties because it is market standard in a wide range of sectors and markets.
Has English law now become a less (or more) attractive choice following the Brexit vote?
In our view, Brexit should not have an impact on the attractiveness of English law in the vast majority of cases.
It is still predictable and certain. Substantive English contract law in the commercial context has in general terms been largely unaffected by European law. The law on almost all key contractual issues including offer, acceptance, consideration, implied terms, exclusion clauses, breach and damages derives from common law. So there is no reason to think that these fundamental common law principles of English law will change on Brexit. The same is broadly true in relation to tort law applied in the commercial context, save perhaps in relation to certain statutory torts that have a European law basis.
There is also no reason to think that English law will be any less flexible or familiar on Brexit.
There are some narrow and technical areas where Brexit may make a difference. For example, one of the ECB's collateral eligibility requirements for asset-backed securities is that the acquisition of the underlying cash-flow generating assets is governed by the law of a Member State. It remains to be seen whether we will see any change to this requirement post-Brexit. Assuming it remains in place it is conceivable that some market participants might consider moving away from English law as the governing law of asset purchase and sale arrangements in securitisations, if the security would otherwise be eligible, and they think that this might make the instruments more marketable. Outside these narrow areas, however, we do not think that Brexit will have any real impact on the reasons why parties choose English law.
Will the English courts or the courts of other Member States be less likely to respect a choice of English law post-Brexit?
As things currently stand, the courts of all Member States apply the same set of rules to determine the governing law of both contractual and non-contractual obligations in most commercial contexts – the Rome I and Rome II Regulations.
Both of these Regulations require Member State courts to respect governing law clauses agreed between commercial parties, subject only to certain limited exceptions. This is the case irrespective of whether the chosen law is the law of a Member State and irrespective of whether the parties are domiciled within the EU or in a non-Member State. So Member State courts will continue to respect a choice of English law post-Brexit.
Within the UK, although Rome I and II may no longer be applied by the English courts following Brexit, it is almost inconceivable that they would change their general approach to respecting a choice of English law.
The English courts have respected English contractual governing law clauses since the nineteenth century. The respect given by the English courts to non-contractual governing law clauses is less deep-rooted. But non-contractual governing law clauses have become market standard post-Rome II and the widespread recognition that such clauses increase certainty for commercial parties means that it is highly unlikely that the UK would take a different approach following Brexit.
How easy would it be to amend precedent agreements so that they work under a different governing law?
Much depends on the nature of the contract but in many cases it will not be possible simply to cross out the reference to English law in the governing law clause and replace it with a reference to another law.
In practice parties will need to assess whether contractual terms which were drafted on the basis that they would be governed by English law will have the same meaning or effect in practice if the governing law is changed. This would not be an insurmountable hurdle by any means, but it does require that parties proceed with caution.
In summary, in our view English law will remain a sensible choice for commercial parties in relation to both contractual and non contractual obligations.
Jurisdiction clauses in favour of the English courts are ubiquitous in international contracts. They are commonly used in loan agreements, in derivatives contracts and in capital markets documentation, albeit using slightly different formulations. In our view, in the vast majority of cases, Brexit, or the prospect of Brexit, does not mean that commercial parties need to switch their English disputes mechanism to select a different forum.
However, Brexit reinforces the need for commercial parties (and their lawyers) to be scrupulous about the inclusion (and drafting) of jurisdiction clauses in every contract. This is because the default or fallback position in the absence of an effective choice is likely to be much less certain post-Brexit than currently.
What factors influence a choice of forum?
It is prudent to investigate the pros and cons of any particular court system that a party is proposing to select as the forum in which to resolve commercial disputes.
Sensible questions include: Will the specified courts accept jurisdiction over the dispute in the first place? Do these courts have a good reputation for transparency, with experienced commercial judges? Will any dispute be resolved expeditiously or are there long delays in coming to trial and getting a decision? Is there a right of appeal? Can parties seek summary relief? Will there be disclosure (also known as discovery) and witness evidence in this legal system? Is there a good pool of local counsel? Is it expensive to litigate in this court system? Will this court order the losing side to pay the costs? Are court judgments published? Is there a system of precedent? Importantly, do these courts have market acceptability?
Parties should also consider the governing law of the contract – will the chosen court apply that chosen law in a predictable way? There are inevitably efficiencies in matching governing law to jurisdiction clauses. So, if choosing English law, it is sensible to choose English courts too.
Another aspect of any forum selection analysis is whether any judgment issued by the selected court will be enforced in other jurisdictions in which the defendant (counterparty) may have assets. In practice, however, cross-border enforcement of judgments in the commercial context is rare. Only a limited number of cases ever go to trial. Once a judgment is issued, if it is not paid, workouts or insolvency petitions are likely.
Why have the English courts historically been a popular choice?
The English courts have proved a popular forum for the resolution of international disputes over the years precisely because they score highly in commercial parties' assessment of the factors outlined above. For example, the English judiciary has a reputation for independence and experience. The "loser pays" rule deters many unmeritorious claims. There is extensive disclosure, active case management and a system of precedent. Importantly, the English courts have credibility in the financial markets.
Will any of the reasons why parties currently choose the English courts be affected by Brexit?
The reasons listed above for choosing the English courts are unaffected by Brexit.
However, two further factors arise which may be affected by Brexit. First, the recognition of English jurisdiction clauses. Secondly, the enforcement of English judgments.
As a preliminary point on enforcement, English judgments are readily recognised and accepted around the world even when there is no reciprocal regime in place. The UK is also party to various bilateral agreements with commonwealth nations which will be unaffected by Brexit.
English judgments are currently enforceable in EU Member States via a simplified process under the Brussels Recast and in Switzerland, Iceland and Norway under the Lugano Convention . Unless alternative arrangements are put in place as part of the UK's withdrawal arrangements from the EU, (for example the UK may seek to sign up to the existing Brussels regime by way of special treaty arrangement), the Brussels Recast will cease to apply and the UK will cease to be party to the Lugano Convention on Brexit (we recognise that there is a technical debate that the UK may still be bound by Lugano or even an early predecessor to the Recast, the Brussels Convention). The streamlined enforcement process under these European regimes would therefore not be available.
The UK would also no longer be part of the Hague Convention as the EU acceded to this Convention on behalf of Member States (other than Denmark) on 1 October 2015.
Will English jurisdiction clauses still be respected in Member States on Brexit?
The answer to this question is "yes", in the vast majority of cases. But to answer this question more precisely, it is necessary to break down the question and consider the position in relation to different types of clauses.
1. Will exclusive English jurisdiction clauses be respected in another Member State court?
Yes – We anticipate that the UK will ratify the Hague Convention as soon as it can upon Brexit. It does not require the consent of other Contracting States to do so. Under the Hague Convention, Contracting State courts will "suspend or dismiss" proceedings if those proceedings have been brought before them in breach of an exclusive jurisdiction clause in favour of another Contracting State (Art 6). This means that, where there is an English exclusive jurisdiction clause, this clause will be respected across Member States under the Hague Convention.
2. Will asymmetric English jurisdiction clauses be respected in other Member State courts?
Yes, but the analysis is a little more complex. The Hague Convention covers exclusive jurisdiction clauses, not asymmetric clauses or non exclusive clauses so it is not relevant in this scenario.
- If proceedings have already been commenced in England, the Member State court will have discretion to stay proceedings brought before it under Articles 33 and 34 of the Brussels Recast.
- If no proceedings have been commenced, another approach would be for the Member State court to give Article 25 of the Brussels Recast (which deals with Member State jurisdiction clauses) reflexive effect (ie treat the rules as applying to non-Member State clauses). This was the approach of Mrs Justice Proudman in Plaza BV v Law Debenture Trust Corp.
- A further alternative is that the Member State court could apply national rules and recognise the jurisdiction clause on that basis.
- Another possibility is that the UK may sign up to the Lugano Convention 2007. This would require agreement of other Contracting States (the EU Member States, plus Switzerland, Iceland and Norway) and so may not be straightforward. Under this Convention, Contracting States agree to recognise jurisdiction clauses in favour of other contracting states in the same way as they do under the Brussels Recast.
It is recognised that there is an argument that in this scenario a Member State court might take jurisdiction if it considered it had to because the defendant was domiciled in that Member State (as per the CJEU decision in Owusu). We are not aware of authority where this approach has been taken, but if neither the Hague Convention nor the Lugano Convention apply, then this possibility cannot be entirely discounted.
However, even if a Member State court did take jurisdiction in this scenario, then the English court could nevertheless proceed with its action (not being bound by EU lis pendens rules which might otherwise require it to halt its proceedings). The English court might even issue an anti-suit injunction (see below) against the party acting in breach of contract.
The same reasoning would apply with a non-exclusive jurisdiction clause.
Will English judgments still be enforced in EU Member States on Brexit?
In short, we consider English judgments will still be enforceable in Member State courts in the vast majority of cases. However, depending on the post Brexit arrangements ultimately agreed, it may take longer and cost more to go through this process in some cases.
Post-Brexit, Member State courts (other than Denmark) will still be able to enforce an English judgment given pursuant to an exclusive jurisdiction clause under the Hague Convention, assuming the UK signs up. However, as discussed above, this will not cover judgments pursuant to asymmetric or non exclusive jurisdiction clauses.
If the UK signs up to the Lugano Convention, English judgments would be enforceable in a Member State and Switzerland, Iceland and Norway, under this Convention, whether pursuant to exclusive, non exclusive or asymmetric clauses.
If neither the Hague nor Lugano Conventions apply (ie an English judgment is simply a "third state" judgment), then in most cases it would still be possible to enforce that judgment in a Member State court under applicable national rules. The same approach would presumably be followed when enforcing an English judgment as when enforcing a New York or Australian or any other third state judgment.
It will take more time and cost more money to enforce under national rules, rather than under a Convention. This is, however, an administrative impact. The important point is that in most cases it can be done.
Article 46 MiFIR
We have been asked about the impact of Article 46 of MiFIR, which contains a provision that requires service providers from third state jurisdictions in certain contexts to "offer" to resolve disputes before the courts of, or a tribunal in, a Member State. Once the UK has left the EU and assuming for these purposes that it is deemed a "third state" and has acquired necessary equivalence approvals for MiFiR to be relevant, then it would appear that in relation to certain specific services being offered into the EU, a UK provider would need to offer to resolve disputes before a Member State Court or tribunal. If this offer was accepted there would be a move away from English courts in certain contracts. While it is not beyond doubt, presumably this "offer" can be rejected and parties can continue to include English jurisdiction clauses if agreed. Interestingly, the provision makes no reference to governing law. The potential application of such a rule is some way off (perhaps only coming into effect towards the end of 2019) but we may see this type of restriction cropping up in other areas of financial regulation.
London arbitration clauses
Arbitration is excluded from the Brussels Recast regime. Enforcement of arbitration awards is governed by the New York Convention 1958, which the UK signed up to individually. Brexit will not impact this arrangement.
ISDA jurisdiction clauses
Certain jurisdiction clauses such as the 1992 and 2002 ISDA Master Agreements are drafted by reference to European legislation. With regard to ISDA contracts, it may be that a market-wide solution via a Protocol would be the most efficient means to ensure the clarity and effectiveness of these clauses post Brexit. We anticipate that this is something that ISDA members will want to discuss as the terms on which the UK is exiting the EU become clearer.
It is important to remember that whatever assessment parties make about their governing law and disputes clauses, if any amendment is made, it will not be possible simply to strike out the governing law or specified court and substitute another governing law or court without proper due diligence. Contract precedents are carefully drafted using specific language which has been tried and tested in the courts. Provisions work in certain legal systems but the very same term may be meaningless or worse unenforceable in another.
If you need assistance reviewing your clauses or drafting your disputes policy over the next few months and years, please do not hesitate to contact us.
1. Regulation (EU) No 1215/2012 sets out the rules on jurisdiction and enforcement of judgments in civil and commercial matters. Effective in all 28 Member States including Denmark.Regulation (EU) No 1215/2012 sets out the rules on jurisdiction and enforcement of judgments in civil and commercial matters. Effective in all 28 Member States including Denmark.
2, [Lugano Convention 2007] – sets out rules on jurisdiction and enforcement of judgments in civil and commercial matters as between EU Member States and Switzerland, Iceland and Norway.[Lugano Convention 2007] – sets out rules on jurisdiction and enforcement of judgments in civil and commercial matters as between EU Member States and Switzerland, Iceland and Norway.[Lugano Convention 2007] – sets out rules on jurisdiction and enforcement of judgments in civil and commercial matters as between EU Member States and Switzerland, Iceland and Norway.[Lugano Convention 2007] – sets out rules on jurisdiction and enforcement of judgments in civil and commercial matters as between EU Member States and Switzerland, Iceland and Norway.