Global Litigator: Brexit and Contracts: What to Do When the Unknown Is Unknown

In the meantime, life must go on. Decisions must be made. One decision for those entering into contracts with a European Union (EU) nexus is what to do about the governing law and jurisdiction provisions in the contract, especially where these point to England. The referendum result hasn’t itself changed anything legally, but it may be necessary to invoke these provisions of a contract in two, three, or more years’ time, when the legal framework might—or might not—be different.

One area where there is, fortunately, little uncertainty is governing law.

Recognition of the governing law of a contract will not change materially as a result of the referendum or a subsequent Brexit. The courts of EU member states will continue to apply the Rome I Regulation, which gives effect to a non-EU law in the same way as to an EU member state’s law. The United Kingdom might decide to continue to apply the rules set out in Rome I, but, even if changes were to be made, the English courts will continue to uphold the parties’ choice of law.

Remember, however, law and jurisdiction are not the same thing even though they often feature in the same or adjacent clauses in a contract. The governing law of an agreement need not be the same as the courts with jurisdiction over disputes arising from the contract, and it is often not. Courts in one country can, and often do, apply the law of another country. While a given law should be the same whatever court is applying it (subject, in rare cases, to overriding mandatory laws or public policy), there may be a greater degree of certainty and comfort when a court is applying its own law.

The current position is that the jurisdiction of the English courts, and that of the courts in other EU member states, is largely dictated by the Brussels I Regulation (recast). This provides that a choice of jurisdiction by the parties should be upheld and that judgments given by the courts of one member state should be enforced in all other member states. After Brexit, the Brussels I Regulation will in all probability cease to apply to the United Kingdom , which has led some lawyers in continuing EU member states to promote the idea that litigation that might have traditionally gone to the English courts should instead be diverted to their courts.

What the post-Brexit jurisdictional and enforcement landscape will look like is one of the innumerable uncertainties. Lawyers can debate enthusiastically whether judgments given in proceedings commenced before Brexit will continue to be enforceable after Brexit, whether the 1968 Brussels Convention will revive, whether the pre-Brussels Convention treaties between the United Kingdom and individual member states will be resuscitated, whether the United Kingdom has a right to adhere to the Lugano Convention, or, if not, whether one or more of the existing parties will block the United Kingdom from doing so, and so on. Interesting though those debates will be, they compound, rather than reduce, uncertainty and offer little help to those who must make a decision now. So what to do?

The first question is what the jurisdiction provision in any particular contract is trying to achieve. If the fundamental objective of the jurisdiction clause is to provide a judgment that will be enforceable throughout the EU, then the uncertainties of the post-referendum world come into play. There is a real risk that, with the probable disappearance from English shores of the Brussels I Regulation and the uncertainties over Lugano and other issues, an English judgment will not be so readily enforceable in the continuing EU as is the case now (the reverse will also obviously be true). This does not mean, of course, that it will be impossible to enforce an English judgment in an EU member state, only that, as with New York judgments, it will be necessary to rely, at worst, on the general rules in each member state regarding the enforcement of foreign judgments. In many instances, this will do no more than add a short delay to the process.

There are, however, many reasons for a choice of jurisdiction other than the enforceability of the resulting judgment within the continuing EU. For example, the party against whom enforcement is likely to be required may not have any accessible assets in the EU. If the party has assets in the United Kingdom or otherwise outside the EU, the issues will be the same pre-Brexit as post-Brexit.

In some instances, enforceability might not be a major issue. For example, a party may have sufficient security against which to discharge its counterparty’s obligations. Or enforcement risk may simply not be a big factor for the particular counterparty. In these situations, a jurisdiction clause may fulfill a more defensive role of ensuring that the party can only be sued in a court in which it has confidence. If so, again the considerations will not have changed significantly as a result of the United Kingdom referendum vote.

Enforcement Solutions

If enforceability of a judgment throughout the continuing EU is important and general law is not sufficient, there are four obvious solutions.

First, give jurisdiction to the courts of an EU member state or a party to the Lugano Convention (Norway, Iceland, and Switzerland, along with the EU). This depends on being comfortable with proceedings in that court, including its procedures, costs, speed, and outcomes.

Second, give nonexclusive jurisdiction to the English courts. This is a “wait and see” approach. It allows the position to be reconsidered at the time that legal proceedings are required. If at that time enforcement remains important and an English judgment is enforceable in the EU, then the English courts can be used; if, however, an English judgment is not enforceable in the EU, it will allow the use of other courts.

A variant on this theme is one-sided exclusivity, which is commonly used in financial contracts. This allows one party to sue in the named courts only but allows the other party to take proceedings in that court or in any other court with jurisdiction. The French Cour de cassation has cast some doubt on the validity of these clauses under the Brussels I Regulation, but that doubt as to a matter of EU law may be less important if the United Kingdom is outside the EU because the English courts will uphold these clauses. It could, however, affect the approach taken by EU member states’ courts to the jurisdiction clause.

Third, arbitration is a possibility. Arbitration is already commonly used if enforcement is important and the counterparty has assets in a location where an English judgment is not enforceable (such as Russia and much of the Middle East) because of the extensive reach of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. All EU member states are parties to the New York Convention, which provides for the enforcement in participating states of an arbitral award given in another participating state. An arbitration seated in a participating state, whether the United Kingdom , a continuing EU member state, or elsewhere, should therefore be able to give an award enforceable throughout the EU.

Fourth, parties could continue with whatever their current policy is. The massive uncertainties surrounding what Brexit will bring could be treated as meaning that the risks of change are as great as the risks of no change. The status quo has a comforting familiarity until there is some positive reason to change.

Contract Law

Substantive English contract law will be unaffected by Brexit because EU law does not, with immaterial exceptions, include provisions that have an effect on business-to-business commercial contract law. Brexit may certainly be a consideration, however, in drafting commercial contracts including U.K. companies.

Whether or not Brexit provides grounds for terminating an existing contract depends, of course, on the terms of the particular contract. It seems unlikely, however, that Brexit per se would provide a ground for termination under a typically drafted material adverse change or force majeure clause.

For those now entering into contracts that might be affected as a result of Brexit (e.g., if tariffs are imposed or there is a change in taxation policy that might render a commercial contract uneconomic), consideration should be given to including express provisions that would entitle termination if one of the specified outcomes actually occurs, or to including a change-of-law or illegality clause, or to both. As ever, the more specific the provision, the more likely it will be enforced. Given the huge uncertainty around what the post-Brexit world will look like, the trick (and the challenge!) will be to sufficiently identify and isolate the key areas of risk and properly define them.