Reform of the Brussels Regulation: are we nearly there yet?
26 April 2013
This article outlines some of the key changes in the recast Brussels Regulation and provides an analysis of the impact these changes may have on commercial parties litigating before Member State courts.
Contributed by Sarah Garvey
After over three years of review, consultation and debate, the process of reforming the Brussels Regulation on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters has now reached its conclusion. On 20 November 2012, the European Parliament voted in favour of the proposed "recast" Brussels Regulation (recast Regulation). This followed a positive vote on the draft by its influential Legal Affairs Committee (JURI) on 11 October 2012. On 6 December 2012, the EU Council also approved the text of the recast Regulation.
Although the reformed or "recast" Brussels Regulation (recent Regulation) has passed through the necessary legislative approval process and been published in the official journal, this recast Regulation (EU Regulation 1215/2012) will not be applied by Member State courts until 10 January 2015. The UK has opted into this recast Regulation, following a detailed consultation in 2010/2011.
Content of the new text
For commercial practitioners, the key changes in the recast Regulation can be categorised as follows:
- changes to the lis pendens (dispute pending elsewhere) provisions where there is a jurisdiction or "choice of court" clause aimed at addressing the problem of the so called "Italian torpedo";
- changes to the rules relating to jurisdiction agreements;
- new rules concerning third state (that is, non-EU) matters and defendants, in particular new provisions introducing a limited international lis pendens rule;
- some new text (principally in the Recitals) regarding the arbitration exclusion; and
- the abolition of exequatur (the need to obtain a court order before enforcing a foreign judgment) and certain changes regarding the recognition and enforcement of Member State judgments in other Member States.
This analysis focuses on the first four changes. The new "streamlined" recognition and enforcement regime for Member State judgments in other Member States (abolition of exequatur) is not covered in this note. Nor are the rules in the recast Regulation relating to insurance, consumer or employment matters.
Background to this reform process
In December 2010, following a consultation process, the European Commission published a draft revised (recast) Brussels Regulation. One particularly controversial proposal contained in the draft was the extension of the Regulation to cover all non-EU defendants and matters, which would mean the abolition of national rules of jurisdiction (in England and Wales, the common law rules and the Civil Procedure Rules (CPR)).
In April 2011, the UK Government indicated that it would opt into the revised draft. The UK Government:
- indicated that it supported the lis pendens revisions;
- argued for the retention of the national rules of Member States on jurisdiction as far as non-EU domiciled defendants are concerned;
- called for more safeguards in the face of the proposed abolition of exequatur; and
- broadly supported the Commission's position on arbitration, although the Government indicated its preferred position was for a total exclusion of arbitration from the Regulation.
Interestingly, overall many of these objectives have been met.
Negotiations on the draft between the Commission, the European Parliament and the Council made substantial progress in 2012, culminating in the adoption at first reading of a compromise text by both the European Parliament (on 20 November 2012) and the Council (on 6 December 2012).
Scope of the recast Regulation
The recast Regulation applies to civil and commercial matters and expressly excludes wills, succession and matters relating to the liability of states for acts and omissions in the exercise of state authority (acta iure imperii) (Article 1(1)). Other exclusions from the ambit of the recast Regulation are set out in Article 1(2) of the recast Regulation.
The bankruptcy exclusion at Article 1(2)(b) (which excludes "proceedings relating to the winding up of insolvent companies or other legal persons, judicial arrangements, compositions and analogous proceedings") has been the subject of academic and judicial comment, in particular as to whether disputes regarding companies in administration are within scope. The recast Regulation offers no further clarification or extension regarding the bankruptcy exclusion, and so despite some EU Court of Justice (ECJ) authority (German Graphics Graphische Maschinen GmbH v Alice van der Schee (Reference for a preliminary ruling) (Case C-292-08)), the precise scope of this exclusion remains unclear.
The recast Regulation seeks to clarify the extent of the arbitration exclusion in Article 1(2)(d) (see further below). In addition, it updates and extends the exclusion at Article (1)(2)(a) relating to the status or legal capacity of natural persons and rights in property arising out of a matrimonial relationship, to cover rights in property arising out of "relationships deemed by the law applicable to such relationship to have comparable effects to marriage". The recast Regulation also now expressly excludes "maintenance obligations arising from a family relationship, parentage, marriage or affinity" (Article 1(2)(e)) and "wills and succession, including maintenance obligations arising by reason of death" (Article 1(2)(f)).
Key changes in the recast Regulation
Revisions to the lis pendens rules
The recast Regulation seeks to tackle the phenomenon of the so called "Italian torpedo". The Commission and European Parliament must be commended for attempting to do so.
By way of reminder, one of the most heavily criticised aspects of the Brussels Regulation relates to the application of its lis pendens rules. Article 27 provides that, where a court is "second seised" of proceedings between the same parties and involving the same cause of action as proceedings already brought before another Member State court, then that court second seised must stay its proceedings until the court first seised has determined whether or not it has jurisdiction to determine the matter. This "first in time" rule applies even where a party brings proceedings in breach of a jurisdiction clause for tactical reasons in the "wrong" jurisdiction. This tactic (known to litigators as an "Italian torpedo") can be particularly effective if proceedings are commenced first in a jurisdiction known for being slow moving or that may not, for example, determine jurisdiction as a preliminary matter.
The ECJ had ruled that seeking to injunct a party from pursuing proceedings before a court not specified in the jurisdiction clause (an anti-suit injunction) was incompatible with concepts of mutual trust set out in the Brussels Regulation (see for example, Gasser GmbH v MISAT srl (Case C-116/02)  ECR I-14693 and Turner v Grovit (Case C-159/02)  ECR I-3565). These tactics often have the effect of preventing progress of a claim in the court designated in the jurisdiction clause for months, if not years. This may severely delay the ultimate resolution of the dispute and waste costs.
Many of the respondents to the Commission's Green Paper in 2009 (including trade bodies, such as ISDA) and the UK Government's consultation highlighted the problems associated with tactical litigation and the difficulties created when a party seeks to exploit these lis pendens rules.
Happily, the Commission and the European Parliament have listened to this common complaint by commercial parties and sought to rectify the problem. There is a clear intention to give priority to the court specified in a jurisdiction clause (the chosen court) and reverse "the first in time" rule where the parties have agreed an exclusive jurisdiction clause.
The new lis pendens rules (Articles 29 to 34) contain provisions that seek to free the chosen court to decide on its jurisdiction and progress the litigation, regardless of whether or not it is first seised. Article 31(2) provides that any court other than the chosen court "shall stay the proceedings until such time as the court seised on the basis of the agreement declares that it has no jurisdiction under the agreement".
Recital 19 (repeating Recital 14 of the existing Regulation) refers to respecting the autonomy of the parties save in specified situations. The recast Regulation now goes further. It includes a new Recital 22, which refers to enhancing the effectiveness of exclusive choice of court agreements and avoiding "abusive litigation tactics". It provides that:
"it is necessary to provide for an exception to the general lis pendens rule in order to deal satisfactorily with ... the situation where a court not designated in an exclusive choice-of-court agreement has been seised of proceedings and the designated court is seised subsequently of proceedings involving the same cause of action and between the same parties. In such a case, the court first seised should be required to stay its proceedings as soon as the designated court has been seised and until such time as the latter court declares that it has no jurisdiction under the exclusive choice-of-court agreement."
The rationale is described as follows:
"This is to ensure that, in such a situation, the designated court has priority to decide on the validity of the agreement and on the extent to which the agreement applies to the dispute pending before it. The designated court should be able to proceed irrespective of whether the non-designated court has already decided on the stay of proceedings."
There are some constraints. A party needs to start proceedings in the designated court in order to trigger a stay of the proceedings commenced first in breach of a jurisdiction clause (Article 31(2)). Further, the Article 31(2) carve-out to the usual lis pendens rules refers to "exclusive" jurisdiction clauses in favour of Member State courts, meaning that there is no requirement for Member State courts to stay proceedings if parties have only sought to confer non-exclusive jurisdiction on another Member State court or parties have sought to confer jurisdiction on a non-Member State court (this is discussed further in section on Jurisdiction and choice of court agreements, below). It would appear that a party seeking to rely on a hybrid jurisdiction clause (discussed further below) may not be permitted to rely on Article 31(2).
Article 31(1) provides that "where actions come within the exclusive jurisdiction of several courts, any court other than the court first seised shall decline jurisdiction in favour of that court". This would be relevant to claims concerning a number of issues which might for example fall within several heads of the exclusive jurisdiction rules in existing Article 22 (new Article 24).
There is a carve-out to the provisions in Article 31 for certain insurance, consumer and employee matters.
Jurisdiction and choice of court agreements
The rules relating to jurisdiction and choice of court agreements (now at Article 25) have been amended in the recast Regulation. The results are mixed.
On the positive side, a new provision (Article 25(5)) expressly states that jurisdiction agreements are separable, that is, it provides that jurisdiction agreements "shall be treated as an agreement independent of the other terms of the contract". The Regulation also provides that the validity of the jurisdiction agreement cannot be contested solely on the ground that the contract is not valid. These new rules are helpful and broadly reflect the current English common law position, namely that the jurisdiction clause is legally separable from the substantive contract in which it was recorded and, therefore, its validity is unaffected by rescission of the contract (see Fiona Trust & Holding Corp v Privalov  UKHL 40 and Deutsche Bank AG & ors v Asia Pacific Broadband Wireless Communications & anr  EWCA Civ 1091and Dicey, Morris and Collins, The Conflict of Laws (15th edition, Sweet & Maxwell, 2012, paragraph 12.112).
On another broadly positive note, the recast Regulation has slightly widened the scope of jurisdiction agreements caught by the Regulation, by removing the requirement in existing Article 23 that such an agreement needs "at least one" party domiciled in a Member State. This relaxation means that the domicile of the parties to such an agreement is irrelevant and should make it easier to establish whether or not the Regulation is applicable in the first place, by avoiding the need for a detailed investigation into the domicile of parties.
The requirement in existing Article 23 that the jurisdiction clause provides that "a court or the courts of a Member State" has jurisdiction remains in place in new Article 25. In other words, if a non-Member State court is specified in a jurisdiction clause, then such a clause falls outside the Regulation.
It is perhaps the great missed opportunity of this recast process that the Regulation was not extended to cover jurisdiction agreements in favour of third (non-EU) state courts. While the incorporation of some new limited international lis pendens provisions (discussed further in New rules regarding pending "third state" proceedings, below) is helpful, the absence of rules in the recast Regulation allowing Member State courts to decline jurisdiction where parties have contractually agreed that the courts of a non-EU state have jurisdiction, is regrettable.
The continuing absence of such rules means, for example, that where a contract includes an exclusive Singapore jurisdiction clause and, in breach of contract, one party starts proceedings in France under the Regulation (for example, under Article 2 (now Article 4 of the recast Regulation), on the basis that the defendant is French), there would appear to be no express provision in the recast Regulation under which a French court might decline jurisdiction. While the new international lis pendens provisions may assist if proceedings in the third state are on foot and initiated first, this remains a lacuna where the third state court proceedings are not commenced first (or not started at all). It means that a Member State court may effectively be forced to sanction a breach of contract.
It has been suggested that this issue might be addressed as part of a renewed EU focus on the Hague Convention on Choice of Court Agreements (which was concluded on 30 June 2005 and sets out a regime for the mutual recognition of exclusive jurisdiction clauses as between contracting states) and an apparent aspiration to secure widespread ratification of this Convention. This seems an incomplete and unsatisfactory response. Not all jurisdiction clauses are covered by this Convention, ratification will be piecemeal and coverage is likely to be patchy for some time to come and, in any event, litigants could in the meantime conceivably see their contractually agreed rights flouted before Member State courts.
The recast Regulation has also sought to harmonise the conflicts of law rule on the substantive validity of choice of court agreements. Article 25 contains a new caveat to the founding of jurisdiction pursuant to a jurisdiction clause that "unless the agreement is null and void as to its substantive validity under the law of that Member State". This would appear to mean that the laws of the Member State court named in a jurisdiction clause govern questions of substantive validity of the jurisdiction clause, even if that is different from the governing law of the contract.
It is unclear precisely how this rule will assist parties. If there is a German jurisdiction clause but proceedings are initiated in Italy, then any question of the clause's validity will be considered as a matter of German law by the Italian courts. It is unclear how this rule operates where two courts are specified in a jurisdiction clause, for example, a dual English and French jurisdiction clause.
Finally, another missed opportunity is that the recast Regulation does not clarify that hybrid (or one-way) jurisdiction clauses are permitted under the Brussels Regulation. Following a recent French Supreme Court decision invalidating a hybrid or one-way jurisdiction clause, there has been a ferocious debate about whether or not such clauses are compliant with the Regulation (X v Rothschild (French Supreme Court, First Civil Chamber, 26 September 2012, No 11-26.022)). Given that such clauses are included in hundreds of thousands of commercial contracts, it would have been very helpful for the commercial sector if this issue could have been addressed in the recast to put the issue beyond doubt.
Special jurisdiction rules
Certain of the key alternative grounds for jurisdiction remain restricted in scope to defendants domiciled in Member States and have not been expanded in the recast Regulation. For example, the following alternative jurisdictional grounds have not been extended to cover third state domiciled defendants:
- Article 5(1) (now Article 7(1)), which provides that, in respect of contractual claims, the courts for the place of performance may have jurisdiction;
- Article 5(3) (now article 7(2)), which provides that claims in respect of torts may be brought in the courts of the place where the harmful event occurred or may occur; and
- Article 6(1) (now Article 8(1)), which provides that, where a Member State defendant is one of a number of defendants, he can be sued in the court of the place where any one of them is domiciled, if the claims are "so closely connected that it is expedient to hear and determine them together to avoid the risk of irreconcilable judgments from separate proceedings".
Further, there was no expansion of the alternative jurisdictional ground regarding contractual claims (Article 5(1) and new Article 7(1)) to include a ground that provided jurisdiction to the courts of the place of the governing law of the contract. It is suggested that this would have been a helpful extension (for example, many guarantees and other commercial documents omit a jurisdiction clause, non-lawyers perhaps considering the inclusion of a governing law provision being sufficient) and also fulfilled the test of legal certainty.
However, the rules have been expanded to cover non-EU domiciled defendants regarding certain employee, insurance and consumer claims.
Exclusive jurisdiction rules
One helpful clarification in the recast Regulation is that the existing exclusive jurisdiction rules at Article 22 (now Article 24) expressly provide that they include claims "regardless of the domicile of the parties".
New rules regarding pending "third state" proceedings
The recast Regulation has introduced some novel provisions which provide, for the first time, Member State courts with a discretion to stay proceedings to take into account proceedings pending before the courts of a (non-EU) third state. A Member State court can do so having assessed "all the circumstances in the case before it" (Recital 24). The circumstances "may include connections between the facts of the case and the parties and the third State concerned, the stage to which the proceedings in the third State have progressed by the time proceedings are initiated in the court of the Member State and whether or not the court of the third State can be expected to give judgment within a reasonable time".
Interestingly, Recital 24 specifically provides that "that assessment may also include consideration of the question whether the court of the third State has exclusive jurisdiction in the particular case in circumstances where a court of a Member State would have exclusive jurisdiction". This would include presumably a third state exclusive jurisdiction clause or where, for example, proceedings relate to patents registered in a third state.
However, there are limitations to these new provisions. For example:
- they require proceedings to have been initiated first in the third state. This means that there remains the prospect of a prospective judgment debtor starting tactical litigation in a Member State court (for example, in the Austrian courts), even though the proceedings relate solely to property based in, say, Hong Kong. If the proceedings in Hong Kong had been commenced second in time or, indeed, had not been commenced at all, then the new provisions at Article 34 are not even engaged and the Member State court in Austria may have no basis upon which to decline jurisdiction; and
- it may encourage more litigation, not less, because it may encourage parties who fear that their counterparty may initiate abusive litigation in a Member State to start proceedings in that third state, so as to ensure they are first in time, perhaps as a purely defensive strategy. This will inevitably increase costs and waste time.
A Member State court seised with an action which is related to the action in the court of the third state, may stay its proceedings if the following apply:
- it is expedient to hear and determine the related actions together to avoid the risk of irreconcilable judgments resulting from separate proceedings;
- it is expected that the court of the third state will give a judgment capable of recognition and, where applicable, of enforcement in that Member State; and
- the court of the Member State is satisfied that a stay is necessary for the proper administration of justice.
The Member State court may dismiss the proceedings before it, if the proceedings before the third state "are concluded and have resulted in a judgment capable of recognition and, where applicable, of enforcement in that Member State" (Article 34(3)).
The Member State court could continue with proceedings if any of the following apply:
- there is no longer a risk of irreconcilable judgments;
- the proceedings in the court of the third state are themselves stayed or discontinued;
- the proceedings in the court of the third state are unlikely to be concluded within a reasonable time; and
- the continuation of the proceedings is required for the proper administration of justice.
This measure goes some way to address the concerns arising out of the ECJ's decision in Owusu v Jackson (Case C-281/02)  ECR I-383.
Overall, this is a welcome step towards introducing some elements of the English forum non conveniens concept into European law.
The arbitration exclusion
- One of the most controversial aspects of the reform process has been in relation to the scope of the arbitration exclusion at Article 1(2)(d). In its Green Paper the Commission made various proposals regarding the existence and scope of the arbitration exclusion from the Regulation. Some of these proposals were radical. For example, one proposal involved deleting the arbitration exclusion from the Regulation altogether and adding a number of new rules regarding the co-ordination of arbitration related proceedings and the enforcement of arbitral awards. The proposals were set against the backdrop of Member State governments reporting almost uniform satisfaction with the workings of the 1958 New York Convention (New York Convention).
- The interface between arbitration and the Brussels Regulation had become particularly problematic in the wake of the decision of the ECJ in Allianz SpA v West Tankers Inc (Case C-185/07). By this decision the ECJ not only held that the English court could not issue an anti-suit injunction to protect a London arbitration agreement where proceedings had been started in Italy but, importantly, found that those Italian proceedings came within scope of the Regulation and "a preliminary issue concerning the applicability of an arbitration agreement, including in particular its validity, also comes within its scope of application". As the UK Government observed in its paper on the Brussels Regulation, this decision gave rise to practical difficulties noting that "whenever a court characterises the subject matter of a claim brought before it as a matter within the scope of the Regulation, any issue as to the existence, scope or validity of an arbitration clause is a preliminary or incidental issue. The result of this is that the courts of the arbitral seat are powerless to protect the arbitration or take any action themselves. In particular they are unable to make their own determinations on the jurisdiction of the arbitrators and are forced simply to await the determination of whichever other court has been seised first. This in effect gives carte blanche to any party wishing to escape an arbitration clause to select its most preferred court in order to decide this issue. It will commence a substantive claim, in the expectation that the other party will then make an application for a stay. Further, once another court has rendered a judgment on any issue concerning the arbitration, it would appear that every other Member State will have to recognise and enforce this decision, thereby undermining the role of the courts of the arbitral seat, and also the application of the New York Convention more generally".
- The Commission established an expert group to consider the interface between the arbitration and the Brussels Regulation and the Commission's initial draft recast Regulation sought to address the West Tankers problem. This initial draft retained the arbitration exclusion but added new text requiring a court seised of a dispute to stay proceedings if its jurisdiction was contested on the basis of an arbitration agreement and an arbitral tribunal had been seised of the case, or court proceedings relating to the arbitration agreement had been commenced in the Member State of the seat of the arbitration. The Commission also proposed a new rule specifying when an arbitral tribunal was deemed seised for these purposes.
- A general consensus appeared to emerge that arbitration was satisfactorily dealt with by the New YorkConvention to which all Member States are party. It appears that the European Parliament (in particular the JURI committee) and Council preferred a somewhat simplified "expanded exclusion" approach. The UK Government certainly favoured this approach. In the compromise text finally agreed last year, the Commission's initial proposed amendments were dropped and the new text adopted (principally at Recital 12) reflected this preferred "enhanced exclusion" approach.
- As noted above, in the recast Regulation the arbitration exclusion at Article 1(2)(d) survives. Indeed, the exclusion is amplified and reinforced by Recital 12 and a new Article 73(2) which expressly states that the Regulation shall not affect the application of the New York Convention. Perhaps a curious feature of this reform is that the amendments appear primarily in the Recitals rather than as operative provisions. This seems to be a favoured European approach on occasions.
- Recital 12 provides that the Regulation should not apply to arbitration and that "nothing in this Regulation should prevent courts of a Member State, when seised of an action in a matter in respect of which the parties have entered into an arbitration agreement, from referring the parties to arbitration, from staying or dismissing the proceedings, or from examining whether the arbitration agreement is null and void, inoperative or incapable of being performed, in accordance with their national law". This would appear to mean that a party may seek an order from the court seised dismissing the proceedings before it and ordering the dispute to be referred back to arbitration. It would also appear that the other party might apply to the courts of the seat for an order referring the parties to arbitration (the lis pendens provisions in the recast Regulation not being applicable as arbitration is excluded from the Regulation).
- Recital 12 expressly excludes certain judgments on arbitration agreements from the scope of the Regulation: "A ruling given by a court of a Member State as to whether or not an arbitration agreement is null and void, inoperative or incapable of being performed should not be subject to the rules of recognition and enforcement laid down in this Regulation, regardless of whether the court decided on this as a principal issue or as an incidental question". This is a helpful amendment as it will limit the scope for the circulation within Member States of inconsistent judgments made in respect of certain arbitration matters.
- Recital 12 provides further helpful clarification of matters outside the scope of the recast Regulation as it states that the Regulation "should not apply to any action or ancillary proceedings relating to, in particular, the establishment of the tribunal, the powers of arbitrator, the conduct of the arbitration procedure or any other aspects of such a procedure, nor to any action or judgment concerning the annulment, review, appeal, recognition or enforcement of an arbitral award".
- Recital 12 does provide that "where a Member State court exercising jurisdiction under the Regulation or national law decides that the arbitration agreement is null and void, inoperative or incapable of being performed, this should not preclude that court's judgment on the substance of the matter from being recognised or, as the case may be, enforced in accordance with this Regulation" although continues that "this should be without prejudice to the competence of the courts of the Member States to decide on recognition and enforcement of arbitral awards" under the New York Convention. It also notes that "The New York Convention takes precedence over the Regulation".
- Overall the amendments in the recast Regulation relating to arbitration are helpful. They give further protection to arbitration in the EU and reduce the scope for tactical litigation in this area. The worst effects of West Tankers are undone. The recast Regulation does not, however, appear to authorise a Member State court to grant an anti-suit injunction in relation to proceedings in another Member State court brought in breach of an arbitration agreement because the requirement of mutual trust remains intact. It is perhaps inevitable that difficult issues will continue to arise in respect of the interface between arbitration and the Regulation, in particular where a Member State court has ruled that an arbitration clause is invalid and delivered judgment on the substance of the matter, whilst another Member State court or arbitral tribunal has reached a different view on validity.
Position of Switzerland, Iceland, Norway and Denmark
The recast Regulation "shall not affect the 2007 Lugano Convention" (Article 73(1)). Non-EU contracting states to the Lugano Convention are Switzerland, Iceland and Norway.
The Lugano Convention contains similar lis pendens provisions to those in the Brussels Regulation. This provision suggests that the inherent problems in the Lugano Convention, such as the lis pendens provisions, would remain. Therefore, if, for example, a dispute involves a Swiss party or a Swiss jurisdiction clause and the Lugano Convention is engaged, then that dispute would be bound by the Lugano Convention. It will still be possible to engage the problematic old lis pendens rules and "torpedo" a Swiss jurisdiction clause. This seems to be a difficulty that perhaps can only be solved by a reform of the Lugano Convention.
Denmark has now confirmed it will adopt the recast Regulation (see agreement between the European Community and the Kingdom of Denmark on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters published on 21 March 2013).
The recast Regulation will not be applied by Member State courts until 10 January 2015. Therefore, it seems likely that we will continue to grapple with Italian torpedos for some time yet.A version of this article was originally published on www.practicallaw.com