Brexit busting – what about dispute resolution after Brexit?13 September 2018
Tucked away at the back of most contracts is a harmless little clause (or sometimes two or more little clauses) dealing with dispute resolution. In many business sectors, they tend not to get negotiated with the parties happy with whatever the template provides for. No-one really likes to think about disputes when entering into a contract, so they can get overlooked very easily.
This may, or may not, be the best way to go forward when thinking of a post-Brexit situation. As you will see at the end of this note, it is probably not the best way to proceed right now. In fact, you might like to take a look at existing contracts and consider whether some of the changes suggested in this note might not be the best way to go.
There are various factors to consider when thinking of dispute resolution. There may be the “fuzzy” clauses around dispute escalation and compulsory mediation before either party may issue proceedings. We are using the word “fuzzy” because such clauses are not essential components of a contract – sometimes nice to have, but not crucial.
However, if it comes to issuing proceedings, then those clauses on governing law and jurisdiction, normally in the boilerplate at the end of a contract, take on an importance they probably did not have during negotiations.
What do contracts need to cover?
When drafting a commercial contract with an international flavour, there are basically three factors to consider:
- Jurisdiction: this is the national forum (or court) before which any dispute will be heard, so applying a particular jurisdiction to a commercial dispute is providing for which country’s courts will hear and decide that dispute.
- Governing law: this is the law which any tribunal will have to apply to the contract – it is NOT the same thing as jurisdiction (see above). A court in England may have jurisdiction but the contract may direct the court to apply, for example, French Law. Sometimes contracts even provide for this – so English Law could be mandated by the contract while the same contract provides that a neutral country’s courts will have jurisdiction to hear the dispute.
- Enforcement: it is no good getting your judgement against the delinquent contract breaker only to face an uphill struggle to get the judgment satisfied (i.e. to make them pay). Considering how you would enforce a judgment is therefore an important factor and very important with Brexit looming.
At the moment, prior to Brexit, there are EU wide regulations providing for all of these things, but the future is currently unclear for the situation post-Brexit.
(In case you were wondering: English courts at least have a good deal of experience applying foreign laws to disputes. A judge can receive evidence of what the foreign law is – normally by hearing the evidence of a lawyer from that jurisdiction. For obvious reasons, this does raise the prospect of some uncertainty as an English judge may well not be versed in that foreign law’s details).
It makes a lot of sense to set this out in the contract. The basic choice is between the courts of a particular country or arbitration. Often, when negotiating an international contract, this becomes a contentious issue: one party wants its courts to have jurisdiction and the other wants its own courts to have jurisdiction. This is not just a question of national pride, though there may be a feeling that the home team gets an advantage before its own national courts, something like the Eurovision Song Contest. It is also a question of convenience – having to go to the other side of the world to instruct lawyers to commence or defend proceedings there can be a real disadvantage, linguistic as well as practical. Sometimes the parties will compromise and choose the courts of a neutral nation, but again you are well advised to choose a governing law and you probably want to have the courts of one state applying its own laws because it is familiar with them, and you do not want to choose a legal system with which you are unfamiliar.
A good option at this point is to consider arbitration as your preferred method of dispute resolution. Arbitration bypasses the logjam of negotiating over whose courts should have jurisdiction. It may even be your first choice for dispute resolution – it has some advantages over litigation (see below). Of course, it raises other issues for the parties to fall out over – who should the arbitrator(s) be and – more importantly – where do they come from (see below).
If you have not chosen arbitration, the Recast Brussels Regulation currently provides for the choice of jurisdiction. The basic rule is that the parties can choose their own jurisdiction in their contract and this will almost always be respected by national courts.
Sometimes, the contract does not specify the jurisdiction – perhaps the parties could not agree and so left it out or perhaps the parties just forgot. In these cases, the same Regulation provides a series of complicated rules to apply a jurisdiction. Without going into too much detail, the first position is that a defendant must be sued in the courts of the country where it is domiciled. However, in contracts for the supply of goods or services (i.e. most commercial contracts) a claimant may elect to commence proceedings in the country where the goods were delivered or the services were provided (or, of course, where the services were intended to be provided or the goods were intended to be delivered).
Example: there is a simple contract for the sale of goods from a seller in England to a buyer in Italy. The contract is so simple that it has not provided for jurisdiction. The goods are found to be faulty on delivery. The Italian buyer can choose to start proceedings either in Italy or England.
The situation is unlikely to change where the parties have provided in their contract for how and where disputes should be settled. So if they have specified English courts or Italian courts, or arbitration with a seat in London, England, courts everywhere should recognise that choice (unless exceptional factors come into play).
The problem comes with those contracts which have not provided for jurisdiction. It then comes down to what deal is done between the UK and the EU to govern the situation post-Brexit and that we do not know at the moment. If there is a “no deal” Brexit, then current EU Regulations will simply cease to apply to the UK and the complex rules for determining jurisdiction will disappear. This would throw the parties back onto disparate national laws and lead to sometimes lengthy and expensive tussles over which court should hear the case – what is known as “satellite” litigation.
Jurisdiction: best practice
It is overwhelmingly better to put something specific in your contract providing for jurisdiction in the event of a dispute. If it becomes a contentious issue during negotiations then consider including an arbitration clause instead. As stated above, this can lead to different arguments – who should the arbitrator(s) be and where should they come from, but at least you have the chance to compromise by allowing for a panel of arbitrators with each contracting party’s country represented. Don’t leave the issue to doubt – too many international commercial contracts end up with lengthy and expensive satellite litigation fighting over which courts should hear the dispute – all because the contract did not make express provision for jurisdiction.
One problem is that the parties sometimes forget to specify a governing law – as stated above, you should not assume that it is the same as jurisdiction. Just choosing e.g. German jurisdiction and saying no more does not necessarily mean that the governing law will be German Law. It might be, but then again, it might not.
Choosing a governing law is important, as the governing law will determine which legal rules are applied to determine the existence of the contract, the rules applied to interpret the contract, the efficacy of the contract’s terms and what rules should apply in the case of breach. This is important stuff – not all legal systems have the same rules on these issues or necessarily come to the same conclusions on the same set of facts.
At the moment, in the EU the Rome I Convention provides for which governing law should apply to determine a dispute. As with jurisdiction, if the parties have expressly chosen a governing law for their contract, this will in the vast majority of cases be respected and upheld. If the parties have not for any reason provided which governing law should apply, then the Rome I Convention applies a series of rules to determine which governing law should apply to a contract. The default rule is that the governing law should be that of the seller.
Example: taking the above example of a simple contract for the sale of goods by an English seller to an Italian buyer, if the contract has not specified any governing law, then the default position is that English law will apply as the seller is English. Taking this forward, as we noted above, the Italian buyer has a choice of bringing proceedings either in England or in Italy – but in either case the first position would be that English Law would be applied to the contract, even if proceedings were commenced in Italy.
(In case you were wondering, the Rome II Convention deals with non-contractual disputes).
Governing law post-Brexit
Political agreement was reached in March 2018 that the Rome I Convention would be applied during the transitional period from 30 March 2019 to 31 December 2020. Assuming this still continues to be the case, there will not be an immediate problem and the UK can continue to apply the rules contained in Rome I. What happens after the transitional period is anyone’s guess.
Governing law: best practice
As with jurisdiction, the overwhelmingly better advice is to provide for this expressly in your contract. If it comes to a impasse in negotiations, then again arbitration provides a way out of the impasse, but even there a decision will have to be made about governing law as the arbitrator(s) will have one governing law or another – attempts to impose two governing laws have been made but can end up being messy (for obvious reasons).
For most commercial disputes, this means getting paid after obtaining a judgment in your favour. Of course, not all remedies are financial – an injunction is an order of a court, not a financial remedy. However, the majority of judgments in commercial disputes are financial in character.
At the moment, the Recast Brussels Regulation governs the mutual enforcement of judgments as between EU Member States and is designed to make the enforcement of a judgment from one court easily enforceable in another Member State’s courts.
There is political agreement that enforcement should be one of those things that carries on untouched during the transitional period. However, there is no final agreement and the prospect of a “no deal” Brexit cannot be ruled out. In that case, the Recast Brussels Regulation, being part of EU law, would simply stop being law in the UK. To enforce a judgment obtained here against an EU business would require finding some other rules by which it could be easily enforced – and those rules do not exist at the moment.
While it might seem perverse, agreement on this point is necessary for Brexit to mean successful trading with the EU as, without those basic rules in place, there is no easy route to enforcing a judgment in an EU Member State (or for an EU business to enforce a judgment obtained in an EU Member State here in the UK).
Enforcement: best practice
At the risk of repetition, the word “arbitration” comes up again. In fact, arbitration comes into its own when talking about enforcement because enforcing awards made by an arbitral tribunal is governed internationally by the New York Convention – which in fact has nothing to do with the EU. In other words, Brexit will have absolutely no effect on enforcing arbitration awards. While not every country in the world is a signatory to the New York Convention, most are and – crucially – all EU Member States are signatories.
This is not the place for an analysis of the differences between arbitration and litigation, and the advantages and disadvantages of each. However, given the uncertainties presented by Brexit when it comes to those little clauses tucked away in the boilerplate at the end of most commercial contracts, the best advice for the time being might be to select arbitration as your preferred dispute resolution mechanism. When looking at your current contracts with EU businesses, there is much to be said for dusting them down and considering whether you should not propose a variation to substitute an arbitration clause in place of a clause providing for national courts to have jurisdiction. After all, both parties have a vested interest in having a clause which is effective when it comes to enforcement.
There are different factors in play when negotiating arbitration clauses, but a suitably drafted arbitration clause in place of a clause providing for a national court to have jurisdiction might well be the best option in terms of reducing the risk of a messy Brexit. Arbitration is not always plain sailing – it is not necessarily cheaper or quicker than litigation, but the certainty it now provides against the prospect of a “no deal” Brexit might just make it the best option for international commercial contracts with businesses in an EU Member State.
As always, this is drafted as a general note dealing with general situations. In fact, questions about choice of law clauses and conflicts of laws are highly complex, so do take specific advice when drafting contracts or handling disputes.