On 29 March 2017, the UK Government served formal notice under Article 50 of the Treaty on European Union to terminate the UK’s membership of the European Union (EU). Brexit is now one of the most talked about topics in political, social and commercial circles today. Of particular interest to companies based in the US which conduct business internationally, is its potential impact on jurisdiction and choice of law clauses in their contracts. With discussions between the UK Government and its EU counterparts ongoing, one of the many issues under negotiation is the extent of judicial co-operation in civil and commercial matters post-Brexit.
A governing law clause enables the parties to specify the system of law that will apply to the interpretation of the contract and its effect should a dispute arise. English law continues to be a hugely popular choice of substantive law in international contracts, regardless of the parties’ locations. With the recognition that English law has a highly developed system of contract law, it remains one of the most sought after legal systems in which to resolve commercial disputes.
We are still waiting for the UK Government to decide the extent to which it will incorporate existing EU legislation into domestic law following Brexit. However, this should ultimately have little to no effect on the choice of US based companies to incorporate an English governing law clause into their commercial agreements. What companies should bear in mind is that English contract law is not affected by EU law on the whole, because it derives from common law. Following Brexit, English law will remain transparent and predictable, as it has centuries of precedent to draw from. English law will continue to give effect to contractual bargains and interpret agreements in a pro-business context.
Moreover, the UK Government has stated its intention to incorporate Regulations 593/2008/EC (Rome I) and 864/2007/EC (Rome II) into UK law post Brexit. This means that English choice of law clauses will still be recognised throughout the EU post Brexit. As such, US companies can feel confident in continuing to incorporate English governing law clauses in their contracts when appropriate.
A jurisdiction clause is a dispute resolution clause which parties incorporate into their contracts to identify which court or courts are to hear a dispute, should one arise. These clauses give the contracting parties certainty about the forum in which future disputes will be litigated.
English jurisdiction clauses will continue to be a sound choice for cross border contracts between the US and UK, no matter the form of Brexit that occurs. Even after the UK leaves the EU, English courts will continue to have highly experienced and able judges to preside over complex international disputes, including those involving jurisdiction issues and application of foreign laws. US litigants will continue to benefit from no jury trials (resulting in potentially fairer damages awards) in civil matters and a system which takes a proactive approach to case and cost management.
If the negotiations between the UK Government and its EU counterparts are not successful and a ‘no-deal’ Brexit eventuates, there is potential for an impact on the enforcement of judgments of the courts of England and Wales across the EU. Currently, holders of such judgments enjoy the almost automatic right to enforce these throughout the EU. Post-Brexit, national law of each EU member state will determine the enforceability of a judgment.
However, Brexit will not change the mechanism for US based companies to enforce judgments obtained in their local jurisdictions through the courts of England and Wales. Under English common law, enforcement of foreign judgments (where there is no reciprocal enforcement treaty in place) requires the judgment creditor to commence a fresh cause of action against the judgment debtor, with the foreign judgment being the cause of action. Judgments from US federal and state courts are regularly enforced in the UK without undue difficulty, despite the fact that the UK and US have no reciprocal enforcement agreement. The UK’s withdrawal from the EU will have no effect on this.
International arbitration is popular due to the flexibility, privacy, neutrality, finality and ease of enforcement that it offers compared to traditional litigation. According to the recently published 2018 International Arbitration Survey: The Evolution of International Arbitration (School of International Arbitration, Queen Mary University of London and White & Case LLP), 97% of respondents indicated that international arbitration is their preferred method of dispute resolution. An overwhelming 99% of respondents would recommend international arbitration to resolve cross-border disputes.
Arbitration will remain unaffected by the outcome of Brexit. The structural framework set by the Arbitration Act 1996 will not be impacted by a withdrawal from the EU and the international arbitration regime is based on the New York Convention (ratified by the US, all EU member states and the UK), which provides for the recognition by national courts of arbitration agreements and international enforcement of arbitration awards.
There are a number of reasons why arbitration in England and Wales is so attractive to businesses, both domestically and abroad. Arbitrators based in London are known for their expertise and commerciality. The UK courts are likewise recognised for their supportive and non-interventionist approach to the arbitration matters which end up in front of them under the Arbitration Act 1996. This will not change post-Brexit. In fact, London’s position as a preferred arbitration centre could actually strengthen. If the UK is no longer bound by decisions of the Court of Justice of the European Union (CJEU), the courts of England and Wales may look to re-establish the use of anti-suit injunctions (which have been previously prohibited by the CJEU), in relation to EU related jurisdictional disputes, to prevent parties commencing actions in the EU courts in breach of arbitration agreements.
In light of the above, US based businesses may now want to consider whether to choose dispute resolution clauses which elect that disputes are resolved by arbitration in London, rather than through litigation.
So, whilst it is prudent for US companies to review their terms of business, English law and jurisdiction of the English courts should remain attractive to international litigants. Many of the factors contributing to the UK’s status as a global litigation hub (namely that the legal system provides reliable, independent and swift access to justice) are independent of its membership of the EU and are unlikely to be affected by Brexit.
Disputes between parties based outside the EU, where the subject matter of the dispute has no connection with a member state, are unlikely to be affected by Brexit. In such circumstances, these disputes will be governed by common law principles, statutes, agreements and/or conventions. Therefore, US based companies preparing for potential cross-border disputes with counterparties based in the UK need not be too concerned about the impact of Brexit. The message appears to be - keep calm and carry on.
Note: any reference to English law or English courts refers to the jurisdiction of England and Wales.