03 February 2021
Brexit: What does this mean for businesses in dispute with EU customers and suppliers?
The UK exited the EU on 31 January 2020 and the transition period in the Withdrawal Agreement ended on 31 December 2020.
The UK has now left the single market and existing EU Treaties and general principles of EU law, such as the freedom of movement between Member States, no longer continue to apply to the UK. While the UK may now have a trade deal with the EU, businesses have been left to pick through the detail to figure out what it means for them in practice. There is still a lot of confusion and concern as practical implications become apparent.
One of the key issues that businesses which trade with the EU are having to grapple with is the impact on contractual relationships, particularly regarding the resolution of cross-border disputes for any businesses which have an EU-dimension.
As Rajiv Malhotra, dispute resolution lawyer explains,
‘Prior to the end of the transition period on 31 December 2020, the position was very clear: If you had negotiated a UK-EU contract which said that all disputes should be referred to the English courts and resolved according to English law, then that is generally what would happen. On the odd occasion where an EU customer or supplier tried to issue legal proceedings in their home country, they would be promptly stopped in their tracks.’
The position is now more complicated, as the majority of the previous rules no longer apply and the Government has only made piecemeal provision in an to attempt to preserve the status quo. There is a huge amount of uncertainty around whether choice of court and choice of law provisions will continue to be observed and respected, and also concern around the ease with which it will now be possible for UK judgments to be enforced in EU member states.
Need for legal advice
All of this means that it is now imperative for businesses to take legal advice as soon as a dispute with an EU dimension arises. Of the many things that will need to be considered is whether it might now be preferable to refer a dispute to arbitration, assuming your opponent agrees. This method of dispute resolution remains unaffected by Brexit and so could offer an easier route out of a potentially challenging situation.
Impact of Brexit on contractual ‘choice of law’ provisions
Prior to 1 January 2021, EU member states were required to respect the terms of a choice of law (or ‘governing law’) clause in a commercial cross-border contract. What this meant in practice was that if you had a contract with an EU based customer or supplier which stipulated that disputes between you should be resolved according to the laws of England and Wales then, irrespective of where in the EU your dispute ended up being litigated, it was the laws of England and Wales that would generally be applied.
Post Brexit, the position remains essentially the same given that:
· the regulations which oblige EU member states to bow to the choice of law clauses continue to apply, even where the law that is chosen is not the law of another member state; and
· the regulations have also been incorporated into UK national law.
In view of this, where you have a contract with an EU-based business which is expressly governed by the laws of England and Wales, then you can be fairly confident that the courts in EU member states will continue to honour and uphold your election.
However, it is expected that some EU-based businesses may attempt to ‘try it on’ and push for disputes to be resolved under the law of their home state, particularly where they have been successful in convincing their own courts to exercise jurisdiction over the claim that has arisen. Such attempts must, where appropriate, be robustly resisted with the help of early legal advice.
Impact of Brexit on contractual ‘choice of court’ provisions
Prior to 1 January 2021, there were a series of rules and transitional provisions in place which meant that where the parties to a commercial cross-border contract had agreed that disputes between them should be referred to the courts of a particular EU member state for resolution, then that agreement would usually have to be observed.
Post Brexit, the position has changed substantially. The rules which used to apply no longer have effect and there is now the possibility of proceedings being issued in the courts of a country other than the one you have nominated. This gives rise to the risk of a secondary dispute developing as to which country now has proper jurisdiction.
The Government is doing what it can to address this issue, including joining the Hague Convention on 1 January 2021 as an independent sovereign state (whereas before it had been a party to the Convention through its membership of the EU). However, the Convention only captures clauses which confer exclusive jurisdiction on the courts of a particular country, and not to clauses which confer non-exclusive jurisdiction i.e. those which give one or both parties an element of choice about which courts they are at liberty to use.
The UK is also trying to join the Lugano Convention which offers comparable protection, but which has the added benefit of not only binding EU member states but also the non-EU member countries of Iceland, Norway, and Sweden.
By seeking advice at an early stage, you can quickly gauge whether the Hague (or Lugano) Convention may be able to assist you in ensuring that a choice of court provision is upheld, and also in exploring the possibility of relying on national legislation instead where this is not feasible.
For example, France requires its courts to respect the freedom of commercial parties to choose where disputes between them ought to be resolved. So, it may be possible for you to bring proceedings issued in France to a halt where you can prove that there is an agreement in place which provides for them to be issued somewhere else instead.
English choice of law and jurisdiction clauses will continue to be popular
English law and courts have always been a popular and trusted choice for commercial parties. It is believed this will continue to be the case post-Brexit and reports suggest there has been no significant market trend away from this.
The English courts look to give effect to the autonomy of the parties and what they have freely agreed amongst themselves, rather than imposing terms to give the agreement commercial viability. The English legal system holds a significant body of precedent, providing a high degree of legal certainty. Perhaps most importantly, there is trust in the English judicial system; it is widely considered to be independent, impartial and comes with significant expertise of its judges.
Impact of Brexit on the enforcement of English and Welsh judgments
Prior to 1 January 2021, the Recast Brussels Regulation was in place which provided for the mutual recognition of judgments between EU member states and which also enabled such judgments to be easily and readily enforced. This was particularly true for judgments in respect of uncontested money claims, like judgments in default, which could be fast tracked through the highly effective and efficient European Enforcement Order regime.
Post Brexit, the situation has changed as all of the rules have fallen away except in respect of:
· judgments that remain to be enforced which relate to proceedings that were commenced prior to 1 January 2021; or
· uncontested money judgments in respect of which a European Enforcement Certificate was applied for before 31 December 2020.
In these cases, the old rules will continue to apply. However, for all other cases recourse must now be had to the enforcement rules contained in the Hague Convention, and possibly also the Lugano Convention if the UK Government is successful in its attempts to accede to this. There is also the possibility of relying on bilateral treaties negotiated between the UK and individual EU states, but these are few and far between and many of those that exist predate 1973 when we joined the EU. It is unclear whether or not these will be reactivated.
Most businesses are pinning their hopes on the Hague Convention. However, it is important to note that while the Convention requires that judgments issued by a court located within a contracting state must usually be recognised and enforced in other contracting states, this is only the case where the court that issued the judgment was nominated in an exclusive jurisdiction clause and where the subject of enforcement is not an interim injunction or an order freezing your opponent’s assets.
The Hague Convention will therefore only assist in a limited number of cases, which makes taking expert advice on your options when it comes to enforcement an absolute necessity.
It may be possible for you to rely on the national laws of an EU country to effect enforcement, but this is something that will have to be investigated on a case-by-case basis.
Dealing with cross-border disputes post-Brexit will undoubtedly be more difficult, but there is much that can be done to overcome many of the hurdles that you may encounter. Your chances of achieving a positive outcome will be greatly boosted by consulting a lawyer at an early stage and by taking advice before a dispute escalates.