Brexit – Arbitration or Litigation?

Michelmores’ Partner and Head of International Arbitration, Garbhan Shanks considers the options over one year on from the Referendum.

On 24 June 2016, the result of the UK’s referendum on EU membership revealed that the majority of UK voters had opted to leave the union. Since that date, the UK has seen the resignation of one Prime Minister, High Court and Supreme Court rulings on the correct process for triggering of Article 50 and a general election in which the ruling Conservative Party failed to win an overall majority. Now, over one year on, and following Theresa May’s Florence speech, it is still extremely difficult to predict with any certainty on what terms the UK will leave the EU.

One thing is certain, however; the long-stop date for exit negotiations is March 2019, two years after Article 50 was triggered – at which point all EU Treaties will cease to apply to the UK, including those governing jurisdiction and the recognition and enforcement of foreign judgments.

Given the current uncertainty, should commercial parties who contract on a regular basis with EU/EFTA counterparties be considering arbitration as their preferred dispute resolution mechanism?

The current position

Unless agreed otherwise, the following legislation will all cease to apply to the UK from March 2019:

• The Brussels I (Recast) Regulation, which regulates jurisdiction and the recognition and enforcement of judgments between EU Member States and has direct effect in UK
• The Lugano II Convention, which also regulates jurisdiction and the enforcement of judgments in civil and commercial matters between EU member states and the European Free Trade Association countries other than Liechtenstein, namely Iceland, Norway and Switzerland, and which was incorporated into UK law by the Civil Jurisdiction and Judgments Regulations 2009
• The Hague Convention on Choice of Court Agreements, which requires effect to be given to exclusive choice of court agreement and judgments of the courts nominated thereunder and which is effective between all EU Member States, Mexico and Singapore
• The Rome I and Rome II Regulations, which regulate the law applicable to contractual and non-contractual obligations respectively, in the absence of party choice

It is unclear what, if anything, will replace the above rules, but the government has acknowledged the need to ensure ‘an effective system of civil judicial cooperation’. The House of Commons Justice Committee has also said that:

“We recommend 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 government should aim to replicate the provisions of Brussels I Recast as closely as possible, perhaps using the EU-Denmark agreement as a blueprint. As a minimum, it must endeavour to secure membership of Lugano II and the 2005 Hague Convention in its own right. Rome I and II should be brought into domestic law.”

In its paper dated 22 August 2017 – “Providing a cross-border civil judicial cooperation framework – A future partnership paper”, the government suggested that, following Brexit:

• With regard to contracts concluded before the withdrawal date, “the existing EU rules governing the applicable law for contractual and non-contractual obligations should continue to apply”; and
• Thereafter, “The UK will … seek an agreement with the EU that allows for close and comprehensive cross-border civil judicial cooperation on a reciprocal basis, which reflects closely the substantive principles of cooperation under the current EU framework.”

The government’s report can be read here.

Choice of Court

Where a choice of Court has been made prior to the withdrawal date the existing EU rules should continue to apply to establishment of jurisdiction, and recognition and enforcement of any resulting judicial decision, where a dispute arises to which such a choice applies, whether before or after the withdrawal date.  This is intended to provide certainty to contracting parties, but again it remains to be seen whether the EU countries agree to respect an English jurisdiction clause in a contract. Hopefully, reciprocity will win out, but there is of course no guarantee.

Arbitration as an alternative

Although the government has stated an intention to ensure effective judicial cooperation, at present it is not known with any certainty what that will look like and indeed whether the UK government will be able to negotiate such adequate provision. Commercial parties who regularly contract with other EU Member States/EFTA countries are therefore in a position of not knowing, beyond March 2019, precisely how jurisdiction clauses in their contracts will be interpreted and whether judgments obtained in the UK will be enforcement in other EU/EFTA countries and vice versa.

For such parties, we strongly advise clients to consider, at least in the short term until things become clearer, whether arbitration would be a more effective dispute resolution mechanism given that all 28 EU Member States are party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, as are Iceland, Norway, Switzerland, Mexico and Singapore.